RUSTS,  POOLS  AND 
CORPORATIONS 


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LIBRARY    J 

UNIVERSITY  OF 
CALIFORNIA 

SAN  DIEGO 


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SELECTIONS    AND    DOCUMENTS 
IN    ECONOMICS 


EDITED    BY 

WILLIAM    Z.    RIPLEY,    Pu.D. 

PROFESSOR  OF  ECONOMICS,  HARVARD  UNIVERSITY 


SELECTIONS  AND  DOCUMENTS 
IN   ECONOMICS 

Volumes  in  preparation 

TRADE   UNIONISM  AND  LABOR   PROB- 
LEMS 

By  John   R.  Commons,  Ph.D.,   Professor   of 
Economics  in  the  University  of  Wisconsin 

SOCIOLOGY  AND  SOCIAL  PROBLEMS       • 

By   Thomas   N*.   Carver,  Ph.D.,  Professor  of 
Economics,  Harvard    University 

TAXATION  AND  PUBLIC  FINANCE 

By  Charles].  Bullock,  Ph.D.,  Assistant  Pro- 
fessor of  Economics,  Harvard  University 


EDITED 
WITH    AN    INTRODUCTION 

BY 
WILLIAM    Z.    RIPLEY,  PH.D. 

PROFESSOR   OF    ECONOMICS,    HARVARD    UNIVERSITY 


GINN    &   COMPANY 

BOSTON  •  NKW   YORK  •  CHICAGO  •  LONDON 


COPYRIGHT,  1905 
BY    WILLIAM    Z.    RIPLEY 


ALL  RIGHTS  RESERVED 


(',  I  N  X   cSc  CO  M  1'  A  N  V  •  CAM- 
HRIDC1K    •     MASSACHUSETTS 


PREFACE 

THIS  volume  is  intended  to  be  more  than  a  mere  collection 
of  economic  reprints.  Such  compilations  have  often  been 
made ;  as  for  example  in  Dunbar's  "  Laws  relating  to  Currency, 
Finance  and  Banking";  Rand's  "Economic  History";  and 
in  the  Reports  of  the  United  States  Industrial  Commission. 
This  collection  is  planned  for  use  specifically  as  a  text-book  ; 
not  merely  as  a  handy  volume  for  reference,  or  as  a  collection  of 
original  documents.  It  is  not  intended,  however,  to  supplant, 
but  rather  to  supplement,  the  standard  treatises  on  the  trust 
problem  ;  and  may  readily  be  used  in  connection  with  Jenks's 
"Trust  Problem,"  Ely's  "Monopolies  and  Trusts,"  or  Meade's 
"Trust  Finance."  It  denotes  a  deliberate  attempt  at  the 
application  to  the  teaching  of  economics  of  the  case  system, 
so  long  successful  in  our  law  schools.  With  this  end  in  view, 
each  chapter  is  intended  to  illustrate  a  single,  definite,  typical 
phase  of  the  general  subject.  The  primary  motive  is  to  further 
the  interests  of  sound  economic  teaching,  with  especial  refer- 
ence to  the  study  of  concrete  problems  of  great  public  and 
private  interest.  A  difficulty  in  the  substitution  of  present-day 
social  and  economic  studies  for  the  good,  old-fashioned,  lin- 
guistic ones,  or  for  the  modern  sciences,  —  a  difficulty  especially 
peculiar  to  descriptive  economics  as  differentiated  from  eco- 
nomic theory,  —  has  always  been  to  secure  data  sufficiently 
concrete,  definite  and  convenient  to  form  a  basis  for  analysis, 
discussion  and  criticism.  The  lecture  system  has  its  advan- 
tages in  stimulating  interest  and  —  it  is  to  be  hoped- — arousing 
enthusiasm  among  students.  But  lectures  alone  entirelv  fail 


iv  PREFACE 

to  do  justice  to  the  possibilities  inherent  in  economic  science 
for  rigorously  training  the  mind  in  habits  of  close  and  consecu- 
tive thought.  The  law  has  always  enjoyed  a  peculiar  and  well- 
merited  prominence  among  other  studies  for  this  reason. 

The  first  requisite,  therefore,  for  the  successful  conduct  of 
economic  instruction  in  the  descriptive  field  is  to  provide  raw 
material ;  which  in  discussion,  supplementary  to  the  general 
lectures,  may  be  worked  over  in  detail  in  the  class  room.  Such 
material,  by  reason  of  the  great  increase  in  economic  periodical 
literature  since  1890,  is  now  rapidly  augmenting.  Yet  with 
classes,  as  at  Harvard  University,  often  aggregating  in  such 
economic  courses  from  one  to  two  hundred  men,  resort  by  each 
student  to  the  files  of  such  periodical  literature  is  out  of  the 
question.  Public  documents  are  also  impossible  for  reference 
reading  with  a  class  of  considerable  size.  And  finally,  in  my 
judgment,  a  generally  neglected  and  amazingly  rich  find  lies 
embedded  in  the  mass  of  factual  evidence  accumulated  in  the 
course  of  legal  proceedings  in  our  courts.  The  mere  decisions, 
as  long  currently  used,  are  of  course  well  known.  But  it  is  not 
the  legal  pronouncement  in  the  case,  infrequently  interlarded 
with  brief  statements  of  fact ;  but  the  actual  testimony  adduced 
—  "The  Record"  of  evidence  submitted — which  has  rarely 
been  utilized.  Such  matter  must  be  painstakingly  uncovered, 
abridged,  even  digested,  and  made  more  conveniently  accessi- 
ble to  serve  its  due  end  for  the  teacher.  To  direct  attention  to 
this  material  by  a  few  concrete  illustrations  from  such  sources, 
reprinted  in  this  volume,  is  not  an  unimportant  motive  in  its 
production. 

A  second,  and  by  no  means  inconsiderable,  motive  in  the 
preparation  of  this  volume  has  been  the  hope  that  it  might 
contribute  toward  a  crystallization  of  public  opinion  favoring  a 
reasonable  policy  of  public  control  over  monopolistic  and  cor- 
porate enterprises.  The  general  reader  and  the  legislator,  in 
the  mass  of  loose  generalizations  upon  this  topic,  can  scarcely 
be  expected  to  follow  publications  in  the  technical  economic 


PREFACE  v 

journals.  Such  articles,  unswayed  as  they  should  be  by  selfish 
interest  and  personal  prejudice,  nevertheless,  are  the  main  ones 
which  may  safely  be  relied  upon  in  the  formation  of  a  final 
judgment.  By  gathering  together  in  convenient  form  this 
series  of  papers  and  documents,  it  is  confidently  hoped  that 
progress  toward  the  solution  of  one  of  our  most  troublesome 
public  questions  may  be  in  some  slight  degree  facilitated. 

Most  cordial  acknowledgment  is  due  to  the  Editorial  Boards 
of  the  Political  Science  Quarterly,  the  Economic  Journal,  the 
Yale  Review  and  the  Quarterly  Journal  of  Economics,  and  in 
even  greater  measure  to  the  authors  of  the  several  papers 
herein  reprinted,  for  permission  to  make  use  of  their  material 
in  this  enterprise.  In  every  instance  a  most  hearty  acquies- 
cence in  the  project  has  been  expressed,  for  the  which  I  cannot 
be  too  grateful.  Without  such  assent  the  meagre  original  con- 
tributions of  the  editor  would  have  made  but  a  sorry  show. 
Nor  can  I  refrain  in  this  instance  from  an  expression  of  my 
peculiar  obligation  to  Professor  J.  W.  Jenks  of  Cornell  Uni- 
versity, my  former  colleague  in  the  work  of  the  United  States 
Industrial  Commission,  who  has  been  long  and  deservedly 
recognized  as  a  pioneer  in  this  field  of  economic  study.  To 
my  former  teacher,  Professor  Goodnow  of  Columbia ;  to  my 
colleague,  Professor  Bullock  ;  and  to  Dr.  E.  S.  Meade  of  the 
University  of  Pennsylvania,  I  am  also  more  than  ordinarily 
indebted.  lion.  1C.  B.  Whitney,  former  Assistant  Attorney- 
General  of  the  United  States,  now  of  the  New  York  bar,  has 
also  been  of  great  service  in  awakening  my  interest  in  the 
legal  sources  of  economic  information,  to  which  reference  has 
been  made.  This  volume,  as  it  appears,  is  largely  the  work 
of  my  professional  colleagues  and  friends.  It  is  earnestly  to 
be  desired  that  my  editorial  endeavors  may  serve  to  direct 
attention  anew  to  the  value  and  interest  of  their  contributions. 

WILLIAM    Z.    KIPLEV. 


CONTENTS 

PAGE 

INTRODUCTION ix 

CHAPTER 

I.     THE  MICHIGAN   SALT   ASSOCIATION.     (Early  pooling.)     By 

J.  W.  Jenks i 

II.     THE    DEVELOPMENT   OK    THE   WHISKEY    TRUST.      (A   legal 

trust.)      By  J.   W.  Jenks 22 

III.  THE    WIRE-NAIL    ASSOCIATION    OF     1895-96.      (A    typical 

modern  pool.)     By  Charles  E.  Edgerton  46 

IV.  INDUSTRIAL    POOLING    AGREEMENTS.       (Latest  form  of  iron 

and  steel  pools.)      By  Wallace  E.  Belcher        ...       73 

V.     THE    ADDVSTON    PIPE    COMPANY.      (A    condemned    pool.) 

Argument  of  Hon.  E.   B.  Whitney  ....       86 

VI.  THE  CAPITALIZATION  OF  THE  INTERNATIONAL  MERCANTILE 
MARINE  COMPANY.  (Over-capitalization.)  By  Edward 
S.  Meade  .  .  .  .  .  .  .  .  .105 

VII.     THE    CAPITALIZATION    OF    PIT.LIC-SERVICK    CORPORATIONS. 

(Typical  public  control.)      Bv  William  Z.   Ripley      .          .      121 

VIII.     THE  UNITED  STATICS  STEEL  CORPORATION'S  BOND  CONVER- 
SION.     (Financial  manipulation.)      By  Edward  S.   Meade     149 

LATER    HISTORY   OF  THE    BOND  CONVERSION.      By  William 

Z.   Ripley  .          .         .          .          .          .          .          .          .179 

IX.     UNITED     STATES     SHIPIH'ILDING     COMPANY.       (Fraudulent 

finance.)      By  Hon.   fames  Smith.  Jr.         ....      182 

X.  PROMOTERS'  LIABILITY  FOR  UNREVEAI.ED  PROFITS  —  THE 
ASPHALT  COMPANIES.  (Fraudulent  promotion.)  By 
Henrv  Tatnall.  Esn.  218 


viii  CONTENTS 

CHAPTER  PAGE 

XI.     TRADE    COMBINATIONS    AT    COMMON    LAW.      By  Frank   J. 

Goodnow  .........     230 

XII.  INTERPRETATION  AND  AMENDMENT  OF  THE  SHERMAN  ANTI- 
TRUST ACT.  By  Hon.  P.  C.  Knox  ....  263 

XIII.  THE   TIN-PLATE   INDUSTRY.     (Influence  of  the  tariff.)      By 

Frank  L.  McVey      ........     289 

XIV.  THE  NORTHERN  SECURITIES  COMPANY.      (Condemnation  of 

the  holding  corporation.)     Decision  of  Supreme  Court  of 

the  United  States 322 

XV.  THE  MASSACHUSETTS  BUSINESS  CORPORATION  LAW.  (Pub- 
lic control.)  By  Grosvenor  Calkins  ....  382 

XVI.  THE  PROMOTION  OF  COMPANIES  AND  THE  VALUATION  OF 
ASSETS  ACCORDING  TO  GERMAN  COMPANY  LAW.  (For- 
eign public  control.)  By  Ernest  Schuster  .  .  .  393 

XVII.     THE  NEW  COMPANIES  ACT.  1900.     (English  public  control.) 

BY  .Montague  Barlow         .          .         .          .          .          .          .414 

XVIII.     TRUST  LITERATURE:    A  SURVEY  AND  CRITICISM.     (Bibliog- 
raphy and  economic  analysis.)     By  Charles  J.  Bullock       .     428 

INDEX 475 


INTRODUCTION 

THE  historical  development  of  the  so-called  Trust  Problem  in 
the  United  States  naturally  falls  into  four  more  or  less  clearly 
defined  periods.  The  revival  of  industry  following  the  long 
depression  of  1873-79  began  the  modern  development  of  large- 
scale  production.  Corporations  embodying  the  principles  of 
limited  liability,  delegated  management  and  indirect  ownership 
became  increasingly  prominent  after  1880.  The  first  period 
in  our  trust  history  may  be  said,  therefore,  to  extend  from 
about  this  time  until  1887.  It  was  characterized  by  a  steady 
increase  in  the  size  and  number  of  large-scale  industrial  units. 
Various  pools  and  the  Standard  Oil  Trust  foreshadowed  the 
future.  The  decade  from  1887  to  1897  forms  the  second  period. 
It  was  the  time  of  the  trust  in  the  strict  legal  sense.  Standard 
Oil  Trust  success  since  1882  invited  imitation  in  the  two 
important  industries  of  distilling  and  sugar  refining.  The 
progress  of  monopoly  was  such  that  an  outbreak  of  state  anti- 
trust laws  from  1889  to  1893  indicated  how  fully  public  interest 
had  turned  from  the  regulation  of  railroads  to  that  of  industrial 
monopoly.  It  was  assumed,  in  fact,  that  the  railroad  question 
had  been  in  a  large  measure  settled  by  the  enactment  of  the 
Interstate  Commerce  Act  in  1887.  As  instanced  later  in  this 
brief  review,  the  entire  failure  of  the  trust  expedient,  however, 
in  furnishing  a  legal  basis  for  monopoly  led  to  various  other 
devices,  notably  pooling.  And  the  continuation  of  industrial 
depression,  during  the  four  years  to  1897,  rendered  constructive 
development  unlikely.  The  third  period  from  1897  until  the 
Northern  Securities  decision  in  the  spring  of  1904  was  largely 
influenced  by  the  phenomenal  prosperity  which  began  in  the 
former  year  and  culminated  in  1902.  The  formation  of  com- 
binations in  various  branches  ot  iron  and  steel  manufacture, 
followed  bv  the  great  outbreak  of  corporate  promotion  in  1899, 


x  INTRODUCTION 

led  up  to  the  formation  of  the  United  States  Steel  Corporation  in 
1901.  And  the  prominence  of  holding  corporations,  organized 
under  the  laws  of  New  Jersey,  seemed  to  offer  a  convenient 
substitute  for  the  old  and  discredited  trust. 

The  latest  period  in  the  development  of  the  problem  begins 
with  the  year  1904.  Speculative  scandals  hereafter  mentioned; 
the  great  decline  of  stock  market  quotations  in  1903  ;  the  failure 
of  bright  promises  made  by  promoters ;  a  reviving  interest  in 
railroad  regulation  and  the  tariff;  and  an  increasing  demand 
for  publicity,  have  successively  made  their  appearance.  More 
important  concretely  than  all  of  these,  however,  was  the  in- 
fluence of  the  Northern  Securities  decision  in  the  spring  of 
1904,  which  determined  the  legal  instability  of  the  holding 
corporation.  The  present  seems,  then,  to  be  a  period  of  uncer- 
tainty in  the  minds  of  organizers  and  directors  of  large-scale 
production.  Having  tasted  the  advantages  of  monopoly,  they 
are  not  content  to  relapse  into  a  regime  of  competition.  Pub- 
licity through  the  newly  organized  Bureau  of  Corporations  in 
the  United  States  Department  of  Commerce  has  become  pos- 
sible. Faint  suggestions  of  additional  repressive  legislation 
appear  in  spite  of  increasing  proof  that  the  Common  Law,  even 
in  the  absence  of  statutory  enactment,  is  sufficient,  if  manfully 
invoked,  to  protect  the  rights  of  the  individual.  It  remains  now 
to  be  seen  whether  new  legal  expedients  in  organization  will  be 
sought,  in  the  attempt  to  settle  the  great  controversy  between 
large-scale  industry  which  seeks  the  advantages  of  monopoly, 
and  the  individual  producer  and  the  public  who  demand  the 
benefits  of  competition. 

Monopoly  has  been  sought  under  four  distinct  forms  of 
organization,  which  may  be  briefly  considered  in  turn.  These 
are  the  pool,  the  trust,  the  simple  corporation  and  the  finance 
company  or  holding  corporation. 

The  pool  is  perhaps  the  oldest,  commonest  and,  at  the  same 
time,  most  recently  popular  mode  of  obviating  the  evils  of 
competition.  Industrial  pools,  in  fact,  appear  at  every  stage  of 
our  economic  development  since  the  Civil  War.  They  are  not 
even  eliminated  from  the  situation  by  gigantic  mergers,  so  long 
as  the  latter  are  not  absolutely  monopolistic.  Thus  even  the 


INTRODUCTION  xi 

most  powerful  present-day  combinations,  such  as  the  United 
States  Steel  Corporation,  find  it  necessary  to  become  parties  to 
pooling  arrangements  with  independent  producers.  The  secrecy 
of  these  agreements,  owing  to  a  wholesome  fear  of  the  law, 
renders  them  apparently  less  widespread  and  effective  than 
they  perhaps  are  in  fact.  Such  agreements  may  even  be  inter- 
national in  their  scope,  as  shown  by  the  recent  allotment  of  the 
European  export  trade  in  steel  rails  in  1904  between  the  great 
German  Steel  Corporation,  known  as  the  Stahlwerkverband, 
and  the  English  rolling  mills.  A  seemingly  undue  amount  of 
attention  has  been  devoted  to  the  subject  of  pools  in  this 
volume,  because  of  their  persistency  and  evidently  increasing 
adoption  in  these  various  ways. 

A  type  of  the  earliest  form  of  pool  is  afforded  by  the  Michi- 
gan Salt  Association,  dating  practically  from  1868.  As  de- 
scribed hereinafter  in  detail,1  this  was  an  agreement  for  the 
purchase  of  the  entire  output  of  all  the  important  producers  in 
a  certain  field.  Similar  agreements  were  certainly  operative 
in  the  decade  1880-90,  as  in  the  manufacture  and  sale  of 
cotton  bagging,  wherein  was  controlled  perhaps  two-thirds  of 
the  output  of  the  country.  The  most  notable  pools  twenty 
years  ago,  however,  arousing  widespread  attention,  were  in  the 
distilling  industry.  In  1882  and  probably  even  earlier,  until 
the  formation  of  the  trust,  a  limitation  of  output  and  allotment 
of  sales  was  certainly  relied  upon  to  prevent  undue  competition.2 
The  well-known  pools  in  the  cordage  manufacture  dating  from 
1860  are  also  cases  in  point.  A  far  less  defensible  scheme  from 
a  moral  point  of  view,  revealing  the  possible  evils  inherent 
in  pooling,  is  revealed  by  the  case  of  the  Addyston  Pipe 
Co.  Our  record  of  this  combination3  shows  it  to  have  con- 
sisted of  an  agreement  among  competing  producers  to  fix  a 
monopolistic  price  by  means  of  fictitious  bids,  with  a  division 
of  the  field  to  insure  complete  local  monopoly  for  each  plant. 
More  recently  still,  and  developing  a  peculiar  vigor  since  the 
failure  of  other  attempts  at  monopolization,  either  by  outright 
purchase  or  a  holding  company,  are  the  existing  pools  in  the 
iron  and  steel  industry.  These,  as  described  in  Chapter  IV, 

1  Chapter  I,  p.  I. 


xii  INTRODUCTION 

are  acquiring  increased  importance  in  the  attempt  to  secure 
stability  of  price  in  a  field  peculiarly  subject  to  violent  fluctua- 
tions between  prosperity  and  depression.  When  reasonably 
and  fairly  administered,  having  due  regard,  that  is  to  say,  to 
the  welfare  and  patience  of  the  consuming  public,  they  promise 
some  measure  of  success ;  otherwise  managed,  when  rapacious 
in  unduly  forcing  up  prices,  such  pools  have  generally  resulted 
in  collapse;  with  greater  evils -both  to  the  public  and  their  own 
members  than  those  whose  cure  was  attempted.  This  is  clearly 
exemplified  in  our  reprinted  outline  of  the  history  of  the  Wire 
Nail  Association  of  1 895-96.*  A  still  more  complicated 
arrangement,  of  special  interest  as  throwing  light  upon  the 
difficult  question  of  public  control  in  our  own  anthracite  coal 
field,  is  afforded  by  the  German  Coal  Cartell,  which  at  the  pres- 
ent time  completely  dominates  the  situation  in  that  country.2 

Patent  as  are  the  advantages  to  producers  of  pooling  con- 
tracts, they  suffer  from  two  inherent  defects.  Of  these  the  first 
is  that  they  are  at  variance  with  the  underlying  principles  both 
of  common  and  statute  law,  and  hence  are  not  enforceable 
in  the  courts.  Xo  effective  guarantee  for  good  faith  is  afforded 
other  than  the  creation  of  deposits,  the  imposition  of  fines 
and  other  more  or  less  mechanical  devices.  And  a  second 
objection  lies  in  the  fact  that  pools  are  necessarily  but  tempo- 
rary expedients  after  all,  affording  no  certainty  for  stability  of 
price  or  of  industrial  policy  for  any  extended  period.  It  was 
undoubtedly  an  appreciation  of  these  facts  which  led  to  the 
attempts  in  the  late  '8o's  to  remodel  industrial  combinations  on 
the  pattern  of  the  Standard  Oil  Trust  of  1882.  On  the  other 
hand,  it  may  perhaps  be  affirmed  truly  that  the  very  indefinite- 
ness  and  elasticity  of  such  agreements  has  often  rendered  them 
successful  at  times  like  the  present,  when  more  rigid  devices  are 
proving  somewhat  ineffective  in  controlling  prices  in  the  face  of 
a  rising  tide  of  independent  production. 

A  trust  may  be  defined  as  an  organization  managed  by  a 
board  of  trustees  to  whom  all  the  capital  stock  of  the  constitu- 


INTRODUCTION  xiii 

ent  companies  is  irrevocably  assigned  ;  in  other  words,  the 
original  shareholders  accept  the  trustees'  certificates  in  lieu 
of  former  evidences  of  ownership.  The  outline  of  a  typical 
trust  hereinafter  printed  will  serve  as  an  illustration.1  As  a 
legal  expedient  for  obviating  competition  such  a  trust  is  usually 
discussed  as  if  it  were  now  obsolete,  possessing  historic  interest 
alone.  This  is  only  in  part  true.  As  an  improvement  upon  the 
pool,  both  as  regards  stability  and  effectiveness,  certainly  it 
merits  the  importance  ascribed  to  it  during  the  decade  follow- 
ing 1887.  The  first  appearance  of  this  legal  expedient  dates, 
of  course,  from  the  formation  of  the  Standard  Oil  Trust  in 
i882.2  It  derived  added  prominence  through  the  formation 
of  the  Distillers  and  Cattle  Feeders'  Trust  (Whiskey)  and  the 
Sugar  Trust,  both  in  1887.  It  disappeared  with  the  final 
judicial  condemnation  under  adverse  state  and  Federal  legisla- 
tion in  the  years  1891-92.  The  adverse  decision  in  the  case 
of  the  North  River  Sugar  Refining  Co.  and  the  Standard  Oil 
Co.,  in  Ohio,  finally  proved  the  impossibility  of  this  legal  basis 
for  effecting  combinations.3  Recourse  was  necessarily  had, 
therefore,  to  novel  expedients,  such  as  corporate  organization 
under  the  newly  revised  laws  of  New  Jersey  and  other  charter- 
bartering  states. 

It  is  an  odd  coincidence,  that  organization  under  a  board  of 
trustees  issuing  certificates  representative  of  ownership  of  prop- 
erty, although  condemned  by  the  courts  and  obsolete  as  a 
resource  for  the  great  industrial  combinations  of  the  country  at 
large,  should  still  flourish  under  the  laws  of  Massachusetts. 
This  commonwealth  has,  in  the  main,  steadfastly  resisted  pres- 
sure for  a  loose,  or  even  for  a  liberal,  policy  in  corporate  legis- 
lation ;  yet  it  is  notable  among  the  other  states  to-day  as 
permitting  the  trust  form  of  organization  to  flourish  as  an  ex- 
pedient for  consolidation.  This  is  perhaps  indirectly  an  out- 
come of  the  consistent  policy  of  the  state  not  to  permit  the 
holding  of  real  estate  for  investment  by  corporations  organized 


xiv  INTRODUCTION 

under  its  general  laws.  Moreover,  this  latter  practice  would 
be  difficult  under  the  common  law  rule  against  perpetuities. 
For  about  half  a  century,  therefore,  real  estate  in  Boston,  if  held 
for  permanent  investment  by  a  number  of  people  jointly,  must 
have  its  ownership  vested  in  voluntary  associations,  managed 
by  trustees.  An  important  ruling  of  the  Massachusetts  supreme 
court  in  1899,  upholding  the  validity  of  such  associations,  has 
greatly  enhanced  their  prestige.  A  recent  compilation  includes 
no  fewer  than  sixty  real  estate  trusts  in  the  city  of  Boston  alone, 
holding  upwards  of  $60,000,000  of  property. 

The  immunity  from  governmental  supervision  of  voluntary 
associations  under  trusteeship  especially  in  the  issue  of  capital 
stock,  under  the  strict  Massachusetts  anti-stock-watering  laws 
applicable  to  corporations,  has  recently  invited  an  extension  of 
the  principles  of  trusteeship  into  the  fields  both  of  transporta- 
tion and  industry.  Thus  the  Massachusetts  Electric  Companies, 
controlling  the  stock  of  several  hundred  miles  of  street  railways 
throughout  the  eastern  part  of  the  state,  is  managed  through  a 
board  of  trustees.  This  board  issues  certificates  representing 
the  equity  interest  of  the  original  stockholders  of  the  constitu- 
ent companies  included  in  the  combination  in  the  enterprise. 
This,  it  will  be  observed,  is  quite  analogous  to  the  devices  origi- 
nally adopted  by  the  Sugar  and  Standard  Oil  Trusts.  The 
Massachusetts  Gas  Companies,  in  the  industrial  field,  have  like- 
wise, as  the  virtual  successors  of  the  New  England  Gas  &  Coke 
Co.,  acquired  control  of  illuminating  plants  in  and  about  Bos- 
ton.1 Still  another  form  analogous  to  these  is  found  in  the 
voting  trusts  until  recently  so  common  among  American  rail- 
ways. These  forms  of  control  as  vested  in  a  board  of  trustees 
represent,  not  ownership  of  stock,  but  merely  a  unified  voting 
power  during  a  specified  term  of  years.  As  applied  in  the 
cases  of  a  number  of  industrial  combinations,  such  as  the  Ameri- 
can Bicycle  Co.  since  reorganization,  and  the  International 
Mercantile  Marine  Co.  at  its  inception,  these  voting  trusts  vir- 

1  Professor  John  II.  Cray  has  recently  published  a  considerable  series  of  articles  on 
the  Massachusetts  <,ras  situation  in  the  Quarterly  Journal  of  Economics.  Consult  the 
sam-j  author's  address  in  Pttblications  American  Academy  Political  Science,  1900, 
and  sfeu  Journal  of  Political  Economy,  1903,  pp.  257-272. 


INTRODUCTION  xv 

tually  perpetuate  monopoly.  Although  their  primary  object 
purports  to  be  protection  against  rude  disturbance  of  continuity 
in  financial  policy,  their  utility  for  the  purposes  of  combination 
is  quite  evident.  It  thus  appears  that  the  principle  of  trustee- 
ship in  industrial  management  is  by  no  means  obsolete;  although 
the  statement  is  perhaps  true  as  applicable  to  consolidation  in  the 
great  staple  interstate  industries  of  the  country. 

The  failure  of  the  Trust  form  of  combination  under  adverse 
legislation  and  judicial  decisions1  came  at  a  time  when  the 
industry  of  the  country  was  languishing.  The  period  from 
1893  to  1897  being  one  of  prolonged  and  acute  industrial 
depression,  the  tendency  toward  consolidation  made  little  head- 
way. Sporadic  attempts  at  pooling  in  the  iron  and  steel  indus- 
try were  made  in  1895  and  1896  as  herein  described.2  But  the 
resumption  of  trade  activity  after  this  prolonged  depression 
promptly  brought  the  combination  question  to  the  fore.  At 
the  same  time  the  revival  of  confidence  among  investors  fol- 
lowing a  protracted  period  of  speculative  dulness  opened  new 
channels  of  activity  for  the  financial  agent.  Meade,  in  his 
Trust  Finance,  has  ably  described  the  work  of  the  industrial 
promoter  at  this  time.  The  phenomenal  outburst  of  industrial 
consolidation  in  1899  made  necessary  a  resort  to  a  new  legal 
expedient,  that  of  the  liolding  corporation.  Prior  to  the  enact- 
ment of  the  revised  General  Corporation  Act  of  New  Jersey  in 
1899,  the  uniform  practice  both  in  this  country  and  abroad  had 
been  to  prohibit  by  law  the  holding  of  the  stock  of  one  corpora- 
tion by  another.  Vast  possibilities  were  involved  in  the  amend- 
ment of  this  clause  in  a  code  of  American  corporation  law. 
Corporate  organization  could  henceforth  be  promoted,  not  to 
serve  the  ends  of  industrial  management,  but  solely  in  order 
that  financial  combinations  might  indirectly  control  operating 
companies  through  ownership  of  their  capital  stock.  This  prac- 
tice had  already  been  tested  in  isolated  cases  among  railroads  ; 
as,  for  instance,  in  the  organization  of  the  Pennsylvania  Co 
in  18/0  to  hold  and  control  the  stocks  of  subsidiary  corporations 
owned  by  the  Pennsylvania  Railroad  Co.  west  of  Pittsburg.  In 
1880  the  American  Bell  Telephone  Co.  was  organized  under 

1  Consult  pp.  244  et  jv</.  -  pp.  46  and  78  ntfra. 


xvi  INTRODUCTION 

Massachusetts  law  practically  as  a  holding  company.  Four 
years  later  the  Southern  Pacific  Co.  was  chartered  by  the  state 
of  Kentucky  to  hold  the  stocks  of  parts  of  a  great  railway  sys- 
tem in  other  and  remote  states.  These  were,  however,  all 
organized  under  special  laws ;  while  the  General  Corporation 
Act  of  New  Jersey  of  1899  made  it  possible  to  organize  a  pure 
finance  company  under  a  general  statute.  No  operating  duties 
at  all  were  involved  other  than  to  hold  the  stock,  elect  officers, 
receive  dividends  from  constituent  companies  and  turn  them 
over  to  their  own  shareholders.  At  the  same  time  it  was  neces- 
sary merely  to  maintain  a  nominal  connection  with  the  authori- 
ties in  the  chartering  state  by  renting  desk  room,  displaying  a 
sign  and  making  a  meagre  and  non-committal  annual  report. 

Relatively  few  companies  seem  to  have  taken  advantage  of 
the  New  Jersey  legislation  at  once.  Among  those  which  have 
been  tested  by  extended  experience  is  the  United  States  Rubber 
Co.,  dating  from  1893.  Certain  decisions  of  the  United  States 
Supreme  Court,  notably  those  touching  the  sugar  combination  in 
I894,1  manifested  an  indisposition  on  the  part  of  the  Federal 
courts  to  interfere.  The  prospect  was  inviting  also  in  many 
cases  because  of  the  elasticity  of  the  arrangement.  It  enabled 
promoters  to  purchase  the  stock  control  of  companies  in  the 
open  market  rather  than  at  private  sale.  Less  capital  would  be 
tied  up  in  effecting  a  combination ;  inasmuch  as  ownership,  not 
of  all,  but  merely  of  a  bare  majority  of  the  capital  stock  of  com- 
panies absorbed,  was  necessary.  Legal  experts,  moreover,  hoped 
the  scheme  would  prove  invulnerable.  Consequently,  for  a  brief 
period  the  holding  company  suddenly  assumed  a  noteworthy 
prominence  in  every  branch  of  American  business  life.  The 
Federal  Steel  Co.,  with  a  capital  of  about  $100,000,000,  later 
absorbed  by  the  United  States  Steel  Corporation,  was  chartered 
by  New  Jersey  in  1898.  Ownership  by  stock  control  was  ex- 
tended over  a  considerable  range  of  interlocking  properties  such 
as  ore  bodies,  steel  works  and  railways.  The  following  year 
witnessed  the  incorporation  of  the  Amalgamated  Copper  Co., 
capitalized  at  875,000,000,  as  a  holding  corporation  to  acquire 
and  control  the  stocks  of  copper-mining  companies.  The  year 

1  U.  -S'.  v.  /:'.  ( '.  A'ai^'it  Co.     See  pp.  2^5  and  265  infra. 


INTRODUCTION  xvii 

1900  was  one  of  pause  in  the  consolidation  movement  following 
the  craze  for  company  promotion  in  the  preceding  year.  The 
gigantic  United  States  Steel  Corporation  with  stocks  and  bonds 
aggregating  $1,400,000,000  speedily  followed.1  In  the  rail- 
way field  the  Northern  Securities  Co.  with  $400,000,000  of 
authorized  stock  was  to  acquire  and  control  the  northern 
transcontinental  railway  corporations.2  Then  came  the  so- 
called  Whiskey  Trust,  previously  transmuted  into  the  Distilling 
Co.  of  America,  an  actual  merger  of  four  constituent  corpora- 
tions, taken  over  by  a  pure  finance  company,  the  Distillers' 
Security  Corporation,  capitalized  at  $32,000,000.  The  move- 
ment invaded  the  field  of  commercial  distribution  in  the  Asso- 
ciated Merchants  Co.,  a  holding  corporation  organized  this 
time  under  the  laws  of  Connecticut,  to  hold  the  stocks  of  retail 
dry  goods  establishments  and  incidentally  to  transact  such  busi- 
ness on  its  own  account.  The  Rock  Island  Co.,  with  a  capital 
of  Si  15,000,000,  again  of  New  Jersey,  was  in  1902  patterned 
after  the  Northern  Securities  Co.  As  a  holding  corporation 
it  has  formed  the  basis  of  wholesale  consolidation  of  railway 
lines  west  and  south  of  Chicago.  It  was  even  rumored  that  a 
Southern  Securities  Co.  would  ultimately  take  over  the  control 
of  the  great  transportation  systems  south  of  Mason  and  Dixon's 
line.  In  the  field  of  electric  transportation,  also,  the  holding 
company  has  become  exceedingly  popular  since  1902-03  ;  as 
witness  the  prominent  instances  of  the  Metropolitan  Securities 
Co.  of  New  York;  the  Rhode  Island  Securities  Co.,  owning 
street  railways  throughout  that  commonwealth  ;  and  the  Public 
Service  Corporation  of  New  Jersey,  aiming  at  consolidation  of 
electric  carriage  and  lighting  in  an  important  field.3 

Owing  to  the  uncertain  legal  status  of  the  pure  finance 
company  or  holding  corporation  since  the  Northern  Securities 
decision,4  the  tendency  at  the  present  time  seems  to  be  in  favor 
of  an  actual  merger  of  constituent  corporations  in  a  single  com- 
pany. This  form  of  organization  involves  an  actual  exchange, 
in  some  agreed  ratio,  of  the  securities  of  the  constituent  com- 


xviii  INTRODUCTION 

panics  for  those  of  the  absorbing  concern.  It  is  what  would 
seem  to  have  been  done  in  the  case  of  the  Distilling  Co.  of 
America  in  1899,  afterward  replaced  by  a  holding  corporation. 
An  earlier  example  is  that  of  the  Trenton  Potteries  Co.,  com- 
posed of  eight  factories  which  united  in  1892.  It  has  been 
frequently  stated  that  the  United  States  Steel  Corporation  has 
been  strengthening  its  position,  under  possible  adverse  judicial 
decisions  following  the  line  of  the  Northern  Securities  case,  by 
likewise  eliminating  some  of  its  constituent  concerns  and  acquir- 
ing a  direct  ownership.1  The  practical  difference  between  this 
form  of  merger  and  a  holding  company  appears  principally  in 
those  cases  where  the  holding  company  owns  not  all  but  only 
a  part  of  the  capital  stock  of  its  constituent  corporations. 
Where,  as  in  the  case  of  the  United  States  Steel  Corporation 
or  the  American  Agricultural  Chemical  Company,  the  entire 
ownership  of  the  stock  of  the  constituent  companies  occurs,  the 
holding  company  becomes  truly  a  legal  fiction.  There  is  no 
legitimate  excuse  for  its  existence.  The  Distillers'  Security  Cor- 
poration, on  the  other  hand,  owns  only  about  ninety  per  cent  of 
the  preferred  and  common  stock  of  its  predecessor,  the  Dis- 
tilling Co.  of  America.  In  the  case  of  railroad  holding  com- 
panies the  general  rule  seems  to  be  that  all,  or  nearly  all,  of 
the  stock  of  the  operating  companies  is  controlled.  The  North- 
ern Securities  Co.  absorbed  all  of  the  Northern  Pacific  stock, 
although  it  held  merely  a  controlling  interest  in  the  Great 
Northern  Railroad.  The  Rock  Island  Co.  owns  all  of  the 
stock  of  the  C,  R.  I.  &  P.  Railroad  Co.,  which  in  turn  holds 
nearly  all  the  stock  of  the  C.,  R.  I.  &  P.  Railway  Co.,  which  last 
is  the  real  operating  concern.  The  additional  difficulty  in  the 
case  of  the  intervention  of  a  holding  company  which  has  not 
absorbed  all  the  securities  of  its  constituent  parts  is,  of  course, 
th«  existence  of  a  minority  interest.  Great  and  growing  im- 
portance is  thereby  placed  upon  the  final  determination  of  the 
rights  of  minority  holders  where  the  majority  is  not  a  merely 
temporary  body,  but  a  definite  and  permanent  corporation. 

1  The  "  community  of  interest "  basis  of  consolidation  so  widely  heralded  among 
railways  has  not  been  industrially  applied,  except  possibly  in  the  Standard  Oil  Co. 
after  the  dissolution  of  its  Trust  in  1892. 


INTRODUCTION  xix 

Another  peculiar  feature  of  modern  corporate  finance  which 
is  seemingly  an  outgrowth  of  the  holding  companies  is  the  ever 
increasing  complexity  of  corporate  organization.  This  evil,  for 
so  it  must  be  denominated,  is  peculiarly  apparent  in  the  case 
of  companies  controlling  municipal  franchises.  Wheels  within 
wheels  multiply  until  it  becomes  practically  impossible  to  fix 
responsibility  either  in  the  courts  or  by  way  of  public  control 
administratively.  The  Brooklyn  Rapid  Transit  Co.1  and  the 
Metropolitan  Securities  Co.,  controlling  the  street  railways  of 
New  York  city,  have  most  complicated  relations.  One  of  the 
best  illustrations  is,  however,  afforded  in  the  control  of  the  street 
railways  of  the  city  of  Providence.  The  original  concern  is 
the  Union  Railway  Co.,  a  Rhode  Island  corporation.  Its  stock 
was  purchased  by  the  United  Traction  and  Electric  Co.  of 
New  Jersey,  which  company  has  since  leased  it  again  to 
another  Rhode  Island  corporation,  known  as  the  Rhode  Island 
Company.  The  stock  of  this  corporation  is  in  turn  owned 
by  the  Rhode  Island  Securities  Co.,  which  is  a  New  Jersey 
corporation.  All  the  stock  of  this  organization  is  finally  owned 
by  the  United  Gas  and  Improvement  Co.,  which  is  a  Penn- 
sylvania corporation.  The  infinite  possibilities  in  cases  of  this 
kind  for  obscuring  profits  or  losses  and  minimizing  public  ac- 
countability are  too  apparent  to  need  elaboration.  And  where, 
as  sometimes  happens,  a  small  number  of  minority  stockholders 
in  each  company  exists,  the  confusion  is  greatly  accentuated. 

The  trust  movement  has  brought  to  light  a  number  of  peculiar 
evils  in  corporate  finance,  or  rather  it  has  magnified  preexisting 
tendencies  which  have  long  been  apparent  in  the  case  of  smaller 
organizations.  The  principal  ones  may  perhaps  be  classified  as 
fraudulent  promotion  and  speculative  management.  It  is  diffi- 
cult, however,  to  draw  the  line  clearly  between  recklessness  and 
downright  dishonesty.  A  vast  increase  in  irresponsible  direction 
has  paved  the  way  to  financial  practice  which,  according  to  the 
point  of  view,  may  be  denominated  as  extravagance  or  fraud. 

Many  of  the  promotions  described  in  the  evidence  before  the 
United  States  Industrial  Commission  in  1900  impress  the  conser- 

1  p.  146  infi'ii. 


xx  INTRODUCTION 

vative  financier  as  extravagant.  The  returns  of  both  organizers 
and  banking  syndicates  seem  to  be  excessive.  Meade,  in  his 
able  chapters  in  Trust  Finance,  has  analyzed  many  of  these  in 
detail,  showing  a  certain  justification  for  large  profits  because 
of  the  risk  involved.  But  later  developments  have  brought  to 
light  practices  in  promotion  which  are  more  certainly  repre- 
hensible, and  which  merit  the  name  of  theft.  Two  notable  in- 
stances are  described  in  the  official  reports  of  receivers  in  the 
cases  of  the  Asphalt  and  Shipbuilding  Companies,  reprinted  in 
this  volume.1  Similar  practices  ha/e  also  been  proven  in  the 
organization  of  the  International  Salt  Co. ;  wherein,  apparently, 
a  syndicate  received  upward  of  $6,000,000  worth  of  stock 
out  of  a  total  of  $18,750,000  issued.  The  scandal  of  the 
padded  balance  sheet  of  an  important  combination  is  too 
recent  to  be  overlooked ;  and,  despite  the  secrecy  of  its  pro- 
moters, there  appears  to  be  every  probability  that  enormous 
profits  were  made  in  the  organization  of  the  Amalgamated  Cop- 
per Co.  The  most  obvious  method  of  stopping  these  nefarious 
practices  is  undoubtedly  to  have  them  condemned  by  the  courts. 
This  has  been  done  in  several  notable  instances  of  late.2  It 
would  seem  to  involve  less  economic  loss  to  remove  the  incen- 
tive to  such  reckless  promotion  at  the  outset,  by  regulation  of 
the  conditions  of  flotation,  as  is  done  in  the  excellent  German 
law  described  herein.3  The  Massachusetts  policy  of  restriction 
has  also  undoubtedly  worked  well.4 

The  payment  of  unearned  dividends  is  another  evil  which  in 
the  past  has  not  been  curbed  by  a  series  of  decisions  in  our  Ameri- 
can courts  attempting  to  distinguish  clearly  between  capital  and 
income  accounts.  Nice  questions  of  policy  are  involved  in  the 
determination  of  net  profits.  Meade,  in  his  Trust  Finance, 
again  has  clearly  set  forth  the  unwise  policy  of  many  industrial 
combinations  in  failing  to  provide  a  sufficient  surplus  reserve 
before  beginning  the  payment  of  dividends.  Unfortunately,  in- 
stances of  downright  deception  often  merging  into  fraud,  have 

1  pp.  182  and  218  infra. 

2  On  the  liability  of  promoters  for  unrevealed  profits  consult  the  review  of  cases  by 
the  present  writer  in  the  /onrnal  of  Political  Economy,  Vol.  VIII,  1900,  pp.  535  ct  .^,/. 

3  Chapter  XVI,  p.  joj.  4  Chapter  XV,  and  also  p.  126. 


INTRODUCTION  xxi 

made  their  appearance  in  the  last  few  years.  The  Asphalt  Com- 
panies clearly  exemplify  the  lack  of  a  conservative  policy  in 
accounting ;  as  when,  for  instance,  the  Audit  Co.  of  New  York 
changed  an  apparent  surplus  of  $758,000  to  a  deficit  of  $541,000. 
The  United  States  Realty  Co.  is  another  case  in  point.  Divi- 
dends were  here  paid  on  the  basis  of  profits  on  uncompleted 
contracts,  recalling  the  similar  policy  in  the  case  of  the  U.  S. 
Shipbuilding  Co.1  Numerous  other  concerns  have  since  been 
shown  to  have  followed  the  same  practice,  notably  the  New 
England  Cotton  Yarn  and  the  Virginia-Carolina  Chemical  Co. 
Perhaps  the  worst  offender  was  the  American  Malting  Co.,  in  a 
case  so  extreme  and  so  clearly  fraudulent  that  the  courts  have 
held  the  directors  liable  both  to  creditors  and  stockholders  to  the 
full  amount  of  the  unearned  dividends  declared.2  It  is  earnestly 
to  be  hoped  that  a  few  more  judgments  of  this  kind  will  serve 
to  restrain  the  directorates  of  other  great  corporations. 

The  evil  of  speculative  management  falls  into  several  distinct 
parts.  The  earliest  form  which  it  took  was  the  buying  and  sell- 
ing by  its  own  officers  of  the  securities  of  a  corporation  for  specu- 
lative purposes.  Of  this  sort  are  the  events  in  the  history  of 
the  Whiskey  Trust,  and  a  few  scattered  instances  such  as  the 
manipulation  of  Diamond  Match  funds  in  1896.  American  cor- 
porations, unlike  those  of  England  and  Germany,  fail  in  too 
many  instances  to  prohibit  dealings  in  the  securities -of  a  com- 
pany by  its  own  officers.  The  best  of  them  certainly  do  so,  and 
the  scandals  of  a  decade  ago  probably  emphasized  the  desira- 
bility of  preventing  this  evil.  An  unlimited  power  to  contract 
loans  without  the  approval  of  the  directors  or  stockholders, 
as  in  the  case  of  the  American  Ice  Co.,  is  also  a  constant  men- 
ace to  conservative  management.  Another  phase  of  this  matter 
concerns  the  temptation  to  industrial  management  with  a  view 
to  its  effect  upon  the  stock  market  rather  than  upon  the  per- 
manent welfare  of  the  company.  A  classic  example  is  afforded 

1  pp.  190  et  scq. 

"  The  first  decision  before  the  New  Jersey  Cunt  of  Krrors  and  Appeals  held  the 
directors  liable;  but  before  the  appeal  was  heard  the  state  legislature  so  amended 
the  law  as  to  ren  K-r  the  final  decision  of  little  value.  The  case  was  then  taken  to 
the  Supreme  Court  of  New  York,  and  a  decision  for  damages  amounting  t<>  <>vci 
5i,ooo.ooo  was  obtained  in  December,  1904. 


xxii  INTRODUCTION 

by  the  episode  of  the  American  Steel  &  Wire  Co.  in  1900. 
Secrecy  is  a  constant  invitation  to  the  insider  to  take  advantage 
of  forthcoming  events  at  the  expense  of  the  stockholders.  It 
is  undeniable  also  that  such  speculative  management  greatly 
encourages  speculative  ownership  on  the  part  of  stockholders. 
The  old-fashioned  investor,  secure  in  his  belief  in  the  stability 
of  his  company,  is  replaced  by  a  body  of  temporary  holders 
who  look  for  the  returns  upon  their  investment,  more  in  the 
chances  of  buying  and  selling  and  manipulation,  than  to  per- 
manent and  regular  dividends.  That  this  kind  of  ownership  is 
greatly  encouraged  by  the  very  low  quotations  of  the  stocks  of 
overcapitalized  companies  cannot  be  doubted. 

The  spread  of  the  practice  of  indirect  ownership  through  the 
mediation  of  holding  or  finance  companies  has  also  produced 
a  peculiar  set  of  abuses.  These  are  all  dependent  in  the  main 
upon  the  preservation  of  secrecy  as  to  the  exact  status  of  the 
operating  concern.  Dividends  or  deficits  may  be  shifted  at  the 
will  of  the  directors  from  one  to  another  company  of  the  hier- 
archy. Only  when  disclosure  is  forced  by  financial  stress  or 
judicial  proceedings  is  the  real  state  of  affairs  revealed.  Our 
reprint  of  the  Receiver's  report  of  the  United  States  Shipbuild- 
ing Co.  serves  to  illustrate  this  evil.1  Other  instances  of  the 
creation  of  large  floating  debts  by  constituent  companies,  which 
debts  are  not  apparent  in  the  reports  of  the  parent  concern,  are 
familiar  in  the  case  of  the  United  States  Rubber  Co.  and  the 
New  England  Cotton  Yarn  Co.  The  failure  to  disclose  may, 
however,  at  times  operate  in  the  other  direction.  Stockholders 
are  induced  to  sell  because  of  failure  on  the  part  of  the  manage- 
ment to  make  clear  the  accumulated  profits  of  constituent  com- 
panies. This  would  seem  to  be  exemplified  in  the  recent  history 
of  the  companies  which  constitute  the  so-called  Tobacco  Trust. 
On  the  formation  of  the  Consolidated  Company  in  1901,  the 
majority  of  the  common  stocks  of  the  American  and  Continen- 
tal Tobacco  companies  were  taken  over  in  exchange  for  four 
per  cent  collateral  bonds.  The  holders  of  the  non-dividend  Con- 
tinental stock  parted  with  their  property  without  any  knowledge 
whatever  of  the  profits  which  it  had  been  earning.  Only  after 


INTRODUCTION  xxiii 

they  had  been  given  in  exchange  a  security  with  a  fixed  return, 
did  it  appear  that  very  large  profits  had  accrued.  In  fact,  the 
dividends  of  the  Continental  Co.  were  soon  increased  to  ten  and 
afterward  to  sixteen  per  cent.  The  profits  to  those  who  had 
assumed  control  of  the  Consolidated  Company  were  correspond- 
ingly great ;  inasmuch  as  they  received  all  the  surplus  income 
over  the  fixed  returns  given  in  exchange  for  the  old  securities. 
It  is  the  possibility  of  such  shuffling  as  this  which  has  rendered 
the  bonds  of  the  Consolidated  Company  so  unpopular  that  recent 
plans  for  their  retirement  have  been  consummated. 

Excessive  profits  to  the  management  or  to  banking  syndicates 
from  the  manipulation  or  exchange  of  one  security  for  another 
are  exemplified  in  still  another  way  in  the  notable  case  of  the 
United  States  Steel  bond  conversion  scheme.  This  complicated 
affair  is  sufficiently  described  in  our  reprint,  so  that  further  com- 
ment upon  it  is  perhaps  unnecessary.1 

Overcapitalisation  is  one  of  the  most  frequent,  time-honored 
and  persistent  charges  brought  against  industrial  combinations 
and  against  corporations  particularly  as  distinct  from  other  forms 
of  business  organization.2  The  general  public  avers,  in  behalf 
of  its  interest  as  consumer,  that  while  of  course  there  is  no 
direct  relation  between  capitalization  and  prices,  an  excess  of 
securities  craving  dividends  is  in  itself  an  indirect  incentive 
to  unreasonable  charges.  An  even  more  cogent  objection  than 
this  is  that  the  absence  of  any  direct  relation  between  invest- 
ment value  and  the  volume  of  stocks  and  bonds  confuses  all 
parties  concerned.  This  was  an  underlying  motive  in  the  enact- 
ment of  the  Massachusetts  Anti-Stock-YVatering  Laws  of  1894. 
For  a  divergence  between  the  actual  property  value  and  capital- 
ization may  lead  to  exorbitant  prices  and  dividends  at  the  expense 
of  the  public.3  It  invites  unearned  profits  on  the  part  of  pro- 
moters leading  to  corporate  organization  or  financial  readjust- 
ment in  unnecessary  or  unmerited  instances.  It  stimulates 
extravagance  on  the  part  of  banking  syndicates  in  the  prices 

1  Chapter  VIII.  pp.  149  <•/ .s<y. 

2  On  this  topic  see  Chapters  VI,  VII,  XV,  XVI  and  XVII. 

3  For  recent    state   legislation   alon^   this  theory   consult   E.   D.   Durand  in    )"<,•.'•' 
Re-'itu',  Vol.  XII.  p.  412. 


xxiv  INTRODUCTION 

offered  or  paid  for  constituent  companies.  It  facilitates  internal 
mismanagement,  even  promotes  actual  fraud,  by  the  ease  with 
which  the  most  alert  stockholders  may  be  confused  as  to  the  real 
standing  of  their  own  company.  "And  finally,  it  invites  specula- 
tion and  stock  market  jobbery  among  the  public  by  the  relatively 
small  capital  necessary  to  deal  in,  or  acquire  control  of,  consid- 
erable blocks  of  stock.  It  is  certainly  difficult  to  trace  a  direct 
relation  between  capitalization  and  prices.  In  most  cases, 
probably,  the  evils  ascribed  to  overcapitalization  are  merely  con- 
comitant rather  than  resultant.  In  other  words,  overcapitaliza- 
tion is  often  merely  an  indication  of  financial  recklessness,  which 
makes  itself  known  coincidently  in  other  phases  of  corporate 
conduct.  There  can  be  no  doubt  that  most  of  the  industrial 
combinations  launched  in  1899-1901  were  seriously  open  to 
most  of  these  criticisms.  The  belated  experiment  of  the  Inter- 
national Mercantile  Marine  Co.,  hereafter  described  in  these 
pages,  serves  as  a  good  illustration  of  such  reckless  financiering 
in  recent  years.  Later  developments,  however,  are  tending  to 
show  that  the  lessons  of  overcapitalization  are  being  impressed 
upon  both  promoters  and  the  investing  classes.  Experience  is 
proving  that  in  the  long  run  the  conservatively  capitalized  com- 
panies alone  can  command  banker's  credit,  weather  periods  of 
fiscal  strain  and  hold  the  allegiance  of  investors.  Consequently 
a  number  of  large  companies  have  voluntarily,  or  in  the  process 
of  reorganization,  reduced  the  volume  of  their  outstanding  secur- 
ities. The  National  Lead  Co.  in  1891  reduced  its  capitalization 
from  ninety  to  thirty  million  dollars.  The  Distillers'  Securities 
Corporation  now  has  less  than  half  the  amount  outstanding 
against  its  predecessors.  Only  recently  the  New  England 
Cotton  Yarn  Co.  has  eliminated  the  good-will  item  from  its 
accounts,  thereby  reducing  the  totals  on  its  balance  sheet  by 
about  five  million  dollars.  The  American  Ice  Co.  represents 
its  condition  in  the  following  words  of  its  own  president :  "  It  is 
clear  that  the  capitalization  is  excessive;  that  the  common  stock 
represents  no  earning  capacity  even  under  normal  business  con- 
ditions." Other  recklessly  promoted  companies  now  find  them- 
selves similarly  placed.  Such  elements  in  this  evil  as  are  not 
self-remedying  through  bitter  experience  may  be  most  success- 


INTRODUCTION  xxv 

fully  treated  by  means  of  laws  insuring  full  publicity  and  account- 
ability on  the  part  of  promoters. 

What  is  the  effect  of  industrial  combination  upon  prices? 
No  candid  observer  can  deny  that  monopoly  price  where  pos- 
sible is  much  higher  than  the  price  level  under  competition. 
The  price  of  sugar,  for  instance,  as  Jenks  has  pretty  conclu- 
sively proven,  has  been  effectively  maintained  at  a  high  level, 
despite  improvements  in  manufacture  in  which  the  public  would 
probably  share  through  declining  prices,  with  the  market  an 
open  one.  In  the  same  way  the  price  of  petroleum  products 
has  been  successfully  upheld  by  the  Standard  Oil  Co.  in  the 
face  of  declining  costs  of  manufacture.  Miss  Tarbell  has  shown 
in  a  convincing  way  how  the  market  has  been  controlled  at  the 
expense  of  the  consumer.  In  addition  to  such  facts  as  these, 
it  is  unquestionable  also  that  the  producer  of  raw  materials  has 
likewise  suffered  under  the  industrial  tyranny  of  the  Standard 
Oil  Co.  Both  markets,  alike  for  the  raw  and  finished  product, 
have  been  absolutely  controlled.  The  tendency  is  for  the  mar- 
gin between  crude  and  refined  oil  to  increase  steadily  —  where- 
from,  of  course,  arises  the  enormous  profits  of  the  company. 
In  the  coal  famine  of  1902-03  the  price  of  crude  oil  advanced 
as  a  natural  response  to  the  situation ;  but  the  price  of  the 
refined  product  was  arbitrarily  raised,  not  proportionately,  but 
to  a  point  which  demonstrates  clearly  the  menace  to  public  wel- 
fare which  the  continued  existence  of  the  monopoly  involves. 
The  same  allegations  seem  to  hold  true  also  of  the  great  mo- 
nopoly which  controls  the  beef  and  meat  packing  interests  of 
the  country.  There  again  an  augmentation  of  price  to  the  con- 
sumer appears  to  be  joined  with  a  relative  depression  of  price  to 
the  cattle  raiser.  Other  instances  of  the  maleficent  influence 
of  monopoly  in  thus  controlling  staple  industries  are  less  rare 
than  they  should  be. 

This  extremely  evil  condition  of  affairs  is  fortunately  not 
characteristic  of  all  the  lines  of  industry  wherein  industrial 
combination  has  been  attempted.  Perhaps  this  is  because  the 
monopoly  is  less  complete,  competition  having  arisen  under  the 
prevalence  of  abnormal  prices;  or  it  may  be  due  t<>  the  fact  that 


xxvi  INTRODUCTION 

other  commodities,  not  being  staple  and  necessary  to  life,  are  ex- 
posed to  the  dangers  of  substitution  of  some  other  commodity  pro- 
duced in  a  more  open  market.  The  most  serious  evil  in  respect 
of  monopoly  price  is  often  not  its  high  level  absolutely,  but  its 
arbitrary  inequality  as  between  both  persons  and  places.  Abso- 
lute control  also  implies  possibility  of  manipulation.  It  has  fre- 
quently been  maintained  by  advocates  of  combination  that  a  far 
greater  steadiness  of  price  will  usually  result.  This  plea  has 
been  exhaustively  analyzed  in  a  number  of  instances.  Miss 
Tarbell  discusses  it  in  respect  to  petroleum  products,  and  Jenks 
has  investigated  the  course  of  prices  in  sugar,  whiskey  and 
other  commodities  produced  under  monopolistic  control.  In  all 
of  these  cases  it  has  been  proven  that  sudden  and  violent  changes 
of  price  are  no  less  apt  to  occur  than  in  an  open  market. 
The  cause  in  such  a  case  is,  of  course,  often  different  from  that 
which  obtains  under  free  competition.  But  the  fact  is  that  prices 
may  be  suddenly  lowered  in  a  locality  in  order  to  destroy  inde- 
pendent local  production ;  or  that  discrimination  between  per- 
sons is  made  to  effect  the  same  end ;  whereas,  formerly,  prices 
rose  and  fell  because  of  a  fluctuation  in  the  general  relations  of 
demand  and  supply.  On  the  other  hand,  certain  combinations, 
like  the  United  States  Steel  Corporation,  seem  effectively  to  have 
withstood  an  undue  depression  of  prices  during  the  industrial 
relapse  of  1903-04.  Whether  they  could  have  done  this  without 
the  intervention  of  pooling  agreements,  which  enabled  them  to 
include  independent  producers  in  their  general  programme,  is 
not  as  yet  clear.  Perhaps,  also,  the  monopoly  prevented  an 
abnormally  high  price  level  in  the  "  boom  "  which  preceded  this 
collapse.  That  the  general  level  of  prices  in  iron  and  steel  prod- 
ucts—  steel  rails,  for  example  —  has  been  artificially  supported 
during  1904-05,  scarcely  admits  of  reasonable  doubt. 

A  brief  outline  of  possible  remedies  for  the  present  evils  of 
the  industrial  situation  may  properly  begin  with  the  assumption 
that  so  far  as  individual  repressive  action  by  the  separate  states 
is  concerned,  the  limit  of  legislative  activity  has  about  been 
reached.  State  anti-trust  laws  have  been  enacted  everywhere 
and  in  all  degrees  of  severity.  The  utmost  that  the  separate 


INTRODUCTION  xxvii 

states  can  do  is  perhaps  indicated  by  the  laws  of  Massachusetts, 
making  provision  for  publicity  and  general  supervision.1  The 
charter-bartering  abuses  rife  in  New  Jersey,  Delaware,  Maine 
and  West  Virginia,  by  which  states  confer  rights  upon  corpora- 
tions to  do  things  in  other  states,  forbidden  by  the  laws  of  those 
states,  can  be  abated  only  by  Federal  decisions  like  the  North- 
ern Securities  case.2  Even  under  them,  the  most  that  could 
be  accomplished  would  be  for  each  state  to  purge  its  own  terri- 
tory of  the  nuisances  committed  by  its  neighbors,  through  taxa- 
tion, licenses  or  other  means.  It  becomes  increasingly  apparent 
that  all  effective  remedies  must  be  applied  by  the  Federal  gov- 
ernment. As  commerce  becomes  ever  wider  in  its  range,  so 
must  legislation  proceed  from  a  source  of  authority  equally 
great  and  comprehensive.  A  delegation  of  greater  powers  to 
the  states  from  the  central  government  would  only  increase  the 
present  complexity  of  the  situation. 

The  discussion  of  feasible  remedies  may  also  be  facilitated  by 
eliminating  those  measures  which  would  require  an  amendment 
of  the  Constitution  of  the  United  States.3  Simpler  means  should 
be  first  tested  as  to  their  efficacy.  The  Northern  Securities 
decision  has  cleared  the  way  for  a  trial  of  several  of  these. 
Another  elimination  may  also  be  made  of  projects  for  merely 
strengthening  the  present  prohibitory  features  of  the  Sherman 
Act.  It  is  now  good  legal  opinion  that  the  English  Common 
Law  is  almost  as  effective  as  that  or  any  other  similar  statute 
against  the  evils  of  unfair  competition  and  conspiracy  in 
restraint  of  trade.4  Reduction  of  some  of  our  absurdly  pro- 
hibitory tariff  duties  would  surely  accomplish  much  in  abating 
monopolistic  prices,  either  under  permanent  combinations  or 
temporary  pooling  agreements.5  Hut  that  question  is  so  compli- 

1  Consult  Chapter  XV,  pp.  ^82  ef  si'//.,  also  p.  121.      E.  D.  Durand,  in   YiiL'  AV- 
rit'-i1,  Vol.  XII,  pp.  409-428,  outlines  new  legislation  since  1001. 
-  Chapter  XIV,  pp.  322  i-/  se<}. 

3  Compare    ,6th  Con;;.,  1st  Sess.,   II.  R.  i;oi.     Report  of  the  House  Committee 
on  Ju  liciarv  on  proposal  amendment  to  the  Constitution. 

4  I  Ion.   ]•'..  Ii.  Whitnev,  in  the    Yttfe  AVrvVri'1,  Mav,  1004  ;    compare   aU  >  pp.  2  ,O  if 
.fry.  infra,      llruce  Wyman   of  the    Harvard    I.a\v  S.-hool  proposes  an  appli -ati    n   of 
the  I.a\v  of  the  Public  Calling  in  //,/rrwr./  /</:,'  /vVr/Vti',  V<  >1.  XVII,  pp.  150  an •!  217. 

"'  I'i,f,'  pp.  289  ct  st'i/.  :  aii'l  also  p.  ^4,  an.l  leaks,  Tru.-t  l'r"lilem,  p.  41;  and 
I\>litic;il  Siiiitcc  Qiidr!cr!y,  September,  1904. 


xxviii  INTRODUCTION 

cated  by  other  issues  and  interests  that  effective  action  will  require 
a  profound  modification  of  present  public  opinion.  Hopeful  signs 
that  some  relief  in  this  direction  may  be  soon  granted  are  not 
wanting;  although  one  may  doubt  whether  anything  very  radi- 
cal in  tariff  revision  will  be  accomplished  in  the  near  future. 

The  most  direct  lines  for  remedial  legislation  are  indicated  by 
the  proposals  of  the  former  Attorney-General  of  the  United 
States  as  herein  reprinted.1  His  drastic  suggestion  of  a  pro- 
hibition of  interstate  transport  of  commodities  produced  by 
monopolistic  combinations  was  embodied  in  the  Littlefield  bill 
which  passed  the  House  of  Representatives  in  February,  1903. 
And  the  prohibition  of  use  of  the  mails  would  seem  to  be  ren- 
dered more  practicable  since  the  recent  Supreme  Court  decisions 
in  the  Lottery  cases.2  Certainly  the  necessity  for  amendment 
of  the  Interstate  Commerce  Act  to  prevent  a  continuance  of  the 
evils  of  secret  rebates  and  preferential  tariffs  is  well  recognized. 
The  Elkins  amendments  of  1903  have  accomplished  some 
good,  but  much  yet  remains  to  be  done.  Several  bills  are  now 
prominently  before  Congress  for  action,  being  manfully  sup- 
ported by  President  Roosevelt.  The  field  of  possible  legisla- 
tive action  is  thus  narrowed  to  three  distinct  proportions.  Of 
these,  the  first  is  incorporation  under  Federal  law.  This  plan, 
originally  proposed  by  Mr.  James  B.  Dill  of  the  New  York  bar, 
has  the  approval  of  eminent  corporation  lawyers  both  in  and 
out  of  Congress.3  Such  a  law  must  needs  be  permissive,  not 
mandatory;  but  it  is  urged  that  sufficient  legal  privileges  and 
immunities  could  be  offered,  to  induce  large  corporations  to 
accept  charters  directly  from  the  Federal  government.  The 
second  of  our  remaining  remedies  is  somewhat  analogous.  This 
is  the  recent  proposition  by  Hon.  James  R.  Garfield,  Commis- 
sioner of  Corporations  in  the  newly  organized  United  States 
Bureau  of  Corporations  in  his  annual  report  for  1904.  He  sug- 
gests the  granting  of  a  Federal  franchise  or  license  for  permis- 
sion to  engage  in  interstate  commerce ;  prohibition  of  all  such 

1  pp.  280  et  stg.  2  Vide  p.  274  infra. 

3  Consult  especially  the  discussion  and  proposed  bill  of  Professor  H.  L.  Wilgus 
in  the  Michigan  Lmu  Re-,'ir-i<,  Vol.  II,  1904,  at  pp.  358  and  501.  Also  opinion  of 
Counsel  of  the  U.  S.  Industrial  Commission,  Vol.  XIX,  pp.  686-722. 


INTRODUCTION  xxix 

commerce  to  unauthorized  corporations ;  full  protection  of  the 
grantees  of  such  licenses ;  and  the  requirement  of  such  admin- 
istrative supervision  and  publicity  as  may  be  reasonable.  This 
last  provision  immediately  brings  us  to  our  third  remaining 
proposition  for  remedial  legislation,  underlying  in  principle  all 
the  others,  —  publicity. 

Reasonable  publicity  should  constitute  an  important  feature 
in  any  well-ordered  scheme  of  legislation.  Its  importance  has 
never  been  duly  recognized  in  any  of  the  drastic  state  anti-trust 
laws  thus  far.  The  aim  in  such  laws  has  been  to  prevent  the 
occurrence  of  monopoly  by  prohibiting  it  under  severe  penalties. 
But  the  difficulty  in  the  application  of  such  laws  has  always 
been  to  prove  the  existence  of  the  monopoly.  The  laws  have 
fallen  short  in  this  regard.  They  have  aimed  to  perform  a 
work  of  supererogation.  For,  proof  being  given,  any  conspir- 
acy in  restraint  of  trade  could  in  large  measure  have  been 
condemned  under  the  established  rules  of  the  English  Com- 
mon Law.  Publicity  enters  at  this  point  to  supply  the  defi- 
ciency in  the  remedy,  as  well  as  to  render  the  growth  of  the 
evil  more  difficult  in  first  instance.  For  a  proper  degree  of 
publicity  as  to  the  conduct  of  large  businesses  will  speedily  re- 
veal the  existence  of  abnormal  sources  of  income.  It  will  protect 
the  consuming  public  and  individual  rivals  in  this  way ;  and  at 
the  same  time  it  will  afford  some  guarantee  of  security  for  the 
investing  public  against  internal  financial  rottenness.  The  dis- 
honest promoter,  director  or  banking  syndicate  flourish  only  in 
the  secret  recesses  of  corporate  finance.  For  these  reasons  the 
successful  establishment  of  the  United  States  Bureau  of  Corpo- 
rations in  1903  marks  a  long  step  in  advance.  Much  yet  remains 
to  be  clone.  Information  gathered  by  this  bureau  ought  within 
reasonable  limits  to  be  open  to  the  public,  and  especially  to 
stockholders  ;  instead  of  being  as  at  present  reserved  to  the 
administrative  use  of  the  President  of  the  United  States.  And 
action  looking  to  the  same  end  should  be  taken  also  by  the 
separate  states.1  The  goal  is  certainly  not  yet  reached  ;  but  no 


xxx  INTRODUCTION 

one  can  doubt  that  a  reasonable  publicity  and  administrative 
supervision  for  railroads  and  great  industrial  monopolies,  akin 
to  that  now  applied  to  National  Banks,  will  be  realized  in  due 
time.  No  other  single  remedy  for  the  evils  of  monopoly  can 
hope  to  accomplish  results  of  equal  importance. 

Three  steps  have  already  been  taken  in  the  path  of  reform. 
The  Elkins  amendments  to  prevent  secret  discrimination  in 
freight  rates,  the  law  facilitating  the  progress  of  anti-trust 
suits  in  the  Federal  courts,  and  the  establishment  of  the 
Bureau  of  Corporations  have  all  been  secured  within  two 
years.  With  a  revised  tariff  and  an  amended  Interstate  Com- 
merce Act  in  1905  the  present  administration  would  justly  have 
reason  to  be  proud  of  its  services  to  the  nation. 

WILLIAM  Z.  RIPLEY. 


THE   MICHIGAN   SALT  ASSOCIATION1 

WITHIN  the  last  half-century,  the  amazing  comparative 
growth  of  capital  as  a  factor  in  production ;  the  combi- 
nations of  workingmen  arising  from  their  forced  association  in 
manufacture  according  to  modern  methods,  and  the  ensuing 
discontent — -or  rather,  the  frequent  and  increasingly  emphatic 
expression  of  discontent  —  with  their  lot  on  the  part  of  the 
workingmen,  as  combination  has  increased  their  sense  of 
strength ;  the  combinations  of  capitalists  and  the  startling 
revelations  of  power  afforded  by  such  organizations  as  the 
Standard  Oil  Company  and  the  coal  syndicates  of  Pennsylvania, 
—  all  these  things  have  lent  to  the  study  of  combinations  among 
either  capitalists  or  workingmen,  or  of  cooperative  unions  of  the 
two,  an  especial  interest.  More  frequently  the  subject  has  been 
studied  with  reference  to  workingmen,  the  advantages  and  dis- 
advantages to  them  ;  but  it  seems  no  less  desirable,  from  the 
standpoint  of  the  economist  at  least,  that  combinations  among 
capitalists,  either  for  purposes  of  protection  against  unreason- 
able demands  of  workingmen  or  for  their  own  interests  as  pro- 
ducers, should  be  studied ;  and  that  the  investigation  should 
cover  the  influence  of  such  combinations  on  the  consumers  as 
well  as  upon  the  capitalists  themselves. 

The  story  of  the  Standard  Oil  Company  has  been  told  more 
than  once,  in  words  eloquent  with  the  conviction  of  the  danger 
threatening  our  government  and  civilization  from  the  growth  of 
such  corporations.  The  consumers  of  anthracite  coal  through- 
out the  United  States  during  the  past  two  years,  have  needed 

1  From  the  Political  Science  Quarterly,  Vol.  Ill,  iSSS,  pp.  78-98. 

I 


2  TRUSTS,    POOLS   AND   CORPORATIONS 

no  publicist  to  tell  them  that  some  powerful  influence  has  been 
brought  to  bear  upon  the  price  of  this  product.  Although  far 
less  in  power  than  either  of  the  combinations  mentioned,  the 
Michigan  Salt  Association,  from  the  extent  of  its  influence  over 
the  price  of  an  article  of  food  so  common  and  so  necessary  as 
salt,  as  well  as  from  the  magnitude  of  its  operations  and  its 
great  and  apparently  increasing  power,  seems  to  be  a  fit  subject 
for  a  study  of  this  kind.  The  extent  of  the  influence  of  the 
association  may  be  noted,  when  we  consider  that  Michigan  pro- 
duces more  than  40  per  cent  of  all  the  salt  manufactured  in  the 
United  States,  and  that,  of  the  Michigan  product,  not  far  from 
95  per  cent  will  be  sold  by  the  association  during  the  coming 
year.  In  short,  speaking  generally,  the  price  of  the  salt  con- 
sumed in  all  the  Northern  states  west  of  Pennsylvania  and  New 
York,  until  we  approach  those  bordering  on  the  Pacific  ocean, 
is  the  price  set  by  the  managers  of  this  association.  It  is  the 
purpose  of  this  article  to  give  a  short  sketch  of  the  history  of 
this  combination  of  manufacturers,  with  that  of  others  which 
preceded  it ;  to  describe  its  plan  of  organization  and  its  work, 
and  to  estimate  the  influence  which  it  has  exerted  and  that 
which  it  can  exert  on  the  price  of  salt. 

The  early  settlers  of  Michigan  had  learned  from  the  Indians 
of  the  existence  of  many  salt  "licks,"  or  springs,  in  different 
parts  of  the  state,  and  it  was  thought  even  by  them  that  there 
was  an  opportunity  for  the  growth  of  a  great  industry  in  its 
manufacture.  In  1838  Dr.  Houghton,  the  state  geologist,  called 
the  attention  of  the  legislature  to  these  facts,  and  suggested 
that  an  appropriation  be  made  for  the  sinking  of  test  wells. 
The  time  was  propitious  for  such  a  request.  The  newly  adopted 
constitution  had  declared  :  "  Internal  improvements  shall  be 
encouraged  by  the  government  of  this  state  ;  "  and  the  governor 
had  been  authorized  by  the  ambitious  first  legislature  to  borrow 
on  the  credit  of  the  state  the  sum  of  $5,000,000,  to  constitute  an 
internal  improvement  fund.1  From  this  fund  $3000  were  at 
once  appropriated  ;  the  next  year  815,000  more,  and  small  sums 
in  succeeding  years.  While  salt  was  found,  the  wells  were  not 
sunk  deep  enough  to  yield  brine  in  paying  quantities. 

1  Cooley,  Michigan,  ch.  xiv.      [American  Commonwealth  Series.] 


THE    MICHIGAN   SALT  ASSOCIATION  3 

In  1859,  an  act  was  passed  exempting  from  taxation  all  prop- 
erty used  in  the  manufacture  of  salt  and  offering  a  bounty  of  ten 
cents  per  bushel  on  all  salt  made  in  the  state.  A  corporation, 
the  Saginaw  Salt  Manufacturing  Company,  was  formed  the 
same  year  in  East  Saginaw  to  put  down  a  well  and  engage  in 
the  manufacture  of  salt.  So  little  was  known,  even  by  the 
board  of  directors  and  officers  of  the  company,  regarding  the 
character  of  the  work,  that  it  was  necessary  for  a  committee 
to  visit  the  Onondaga  salt  works  to  learn  what  buildings, 
machinery,  and  tools  were  necessary  for  boring  the  well.  But 
by  February  7,  1860,  the  directors  felt  warranted  in  making  a 
report  to  stockholders,  declaring  the  work  a  success.  In  March 
the  well  was  completed ;  another  one  was  immediately  put 
down  ;  and  manufacture  began  in  July.  The  works  were  thrown 
open  for  inspection  July  4.  In  this  first  year,  1860,  about  4000 
barrels  of  salt  were  manufactured.1 

As  soon  as  it  became  known  that  brine  of  paying  quality  and 
quantity  was  to  be  found  in  the  valley,  capital  was  rapidly 
invested.  In  1862,  243,000  barrels  were  made,  and  in  six  years 
there  were  engaged  in  the  manufacture  of  salt  in  the  Saginaw 
valley,  sixty-six  different  companies  with  an  investment  of  nearly 
$2,000,000. 

TAP.LE  I 

ANNTAL  SALT  PKonrrr  OF  MICHIGAN,   1860-1886 


1864 


BARRELS 

YEAH 

BARRELS 

4,000 

1874   . 

.   1,028.979 

1  2  5  ,OOO 

1875   . 

1,081,865 

24.1,000 

1876   . 

.   1,^62,729 

466,356 

1877   . 

.  1.1,00,097 

_  -,.,  „_  , 

1878 

i  s|-  -  884 

3-.'>  /  .1 

477'200 

1879   . 

2,0^8.040 

407'077 

1880   . 

.  2,070,^88 

474J-1 

iSSi   . 

.  2,750,299 

555.  090 

1882  . 

.  3.037.317 

560,818 

1883  . 

.   2.  8.  ,4.  072 

621.350 

1884  . 

3,101,800 

728.175 

—  11   1  V  I 

1885  . 

i  S86 

}  o~-  ->5~ 

/  -4'4^  l 

^23.340 

4  TRUSTS,   POOLS   AND   CORPORATIONS 

This  table  shows,  in  the  falling  off  of  the  yearly  product,  1865- 
1867,  the  result  of  the  rapid  and  in  many  instances  ill-advised 
investment  of  capital.  Under  the  conditions  obtaining  at  the 
time,  unrestricted  competition  soon  drove  the  weaker  companies 
to  the  wall.  In  those  days,  the  extent  of  the  salt-producing 
territory  and  the  methods  of  manufacture  were  less  well  known, 
and  the  business  was  much  more  of  a  natural  monopoly  than 
now.  Under  these  circumstances,  the  solution  of  the  difficulty 
was  evident :  combination  was  indicated  and  combination  soon 
appeared.  In  a  statistical  summary  of  the  leading  products  of 
the  Saginaw  valley,  published  by  The  Saginaiv  Daily  Enterprise 
in  1867,  we  read:  "This  interest  [salt]  is  somewhat  under  a 
cloud  at  present  through  the  evil  influence  of  speculation  and 
inconsiderate  management."  Then,  farther  down  the  page 
come,  as  one  might  expect,  the  words :  "  At  least  two-thirds  of 
those  [blocks]  now  running  turn  in  their  production  to  the 
Saginaw  Salt  Company."  Thus,  as  early  as  1866,  six  years  only 
after  the  industry  was  started,  \ve  find  that  many  of  the  manu- 
facturers were  uniting  their  interests  so  far  as  the  sale  of  the 
product  was  concerned. 

Soon,  from  individual  agreements  the  leading  firms  came  to 
something  more  stable  and  far-reaching  in  its  influence.  On 
the  1 6th  of  April,  1868,  the  articles  of-  association  of  the 
Saginaw  and  Bay  Salt  Company  were  adopted.  The  first  year 
of  its  existence,  this  association  handled  four-fifths  of  all  the 
salt  shipped  from  the  Saginaw  valley.  Its  benefits  to  the  manu- 
facturers, as  well  as  to  the  consumers,  —  so  far,  at  least,  as  the 
quality  of  salt  is  concerned,  — were  at  once  recognized,  and  are 
clearly  set  forth  in  the  S  fat  is  tics  of  the  Sciginaiv  \\illcy  for  1868  : 

The  operations  of  this  company  have  been  completely  satisfactory, 
and  the  organization  is  unquestionably  of  great  benefit  to  the  salt  manu- 
facturers who  have  availed  themselves  of  the  advantages  it  offers.  It 
has,  so  far  as  its  line  of  operations  has  extended,  brought  about  the  one 
thing  needful,  a  uniform  system  of  inspection,  and  introduced  system, 
order  ami  reliability  into  a  business,  which,  without  such  general  regula- 
tions, has  in  no  quarter  ever  proved  remunerative. 

In  spite  of  the  comp'etition  of  New  York  and  the  Ohio  river 
(relieved  in  part  by  an  agreement  with  the  Onondaga  Salt  Com- 


THE   MICHIGAN    SALT   ASSOCIATION  5 

pany  which  will  be  considered  later),  the  business  grew  with 
remarkable  rapidity,  and  the  association  ran  smoothly  till  1871, 
when  the  vigorous  efforts  of  some  of  the  members  opposed  to 
the  management  became  of  serious  moment.  The  real  merits 
of  the  controversy,  which  became  bitterly  personal,  several  letters 
of  a  violently  abusive  character  being  published,  it  is  hard  to 
determine.  On  the  one  side,  charges  of  mismanagement,  even 
of  dishonest  practices,  were  made  against  the  officers  of  the 
association  by  Duncan  Stewart,  president  of  a  salt  manufactur- 
ing company  ;  on  the  other,  Stewart's  dissatisfaction  was  said 
to  have  been  caused  by  the  refusal  of  the  managers  to  ship  salt 
by  a  line  of  boats  in  which  he  was  interested,  at  rates  above 
those  offered  them  elsewhere.  For  our  purpose  it  is  enough  to 
know  the  result.  In  the  Annual  Statement  of  the  business  of 
the  Saginaw  valley  for  1871,  we  find  it  in  compact  form : 

In  salt,  the  season  of  '71  may  be  quoted  as  of  extra  activity  both  in 
manufacture  and  sale.  Early  in  the  season  it  became  evident  that  a 
commercial  rivalry  had  been  excited  which  could  not  end  but  by  the 
going  to  the  wall  of  one  of  the  parties  engaged  in  it.  Assuming  the 
shape  of  individual  antagonism  to  a  corporate  company,  it  became  at  an 
early  day  evident  that  many  of  the  manufacturers  who  are  members  of 
the  Salt  association,  would  take  sides  with  the  opponents  of  the  associa- 
tion, and  as  a  result  fully  one-fifth  of  the  entire  salt  product  of  the  valley, 
which  under  ordinary  circumstances  would  have  been  handled  by  the 
association,  was  purchased  by  the  firm  of  J.  L.  Hard  &  Co.,  of  Detroit, 
at  prices  in  advance  of  those  realized  by  those  who  remained  in  the  as- 
sociation. Since  the  close  of  navigation,  the  association  has  resolved  to 
suspend  operations  for  the  present,  and  each  manufacturer  will,  during 
the  season,  be  left  free  to  realize  as  best  he  may  on  his  products. 

It  is  significant,  and  somewhat  surprising  to  note  that  by  the 
determined  efforts  of  one  man,  the  association  was  forced  to  sus- 
pend operations,  even  though,  as  has  been  reported,  this  man  was 
compelled  to  destroy  his  own  financial  standing  to  bring  about 
such  a  result.  Table  I,  again,  furnishes  us  with  an  interesting 
comment  upon  this  financial  battle.  For  1 872  the  production 
of  salt  in  the  state  is  more  than  3600  barrels  less  than  that  of  the 
year  preceding;  whereas  both  1871  and  1873  show  a  gain  of 
about  100,000  barrels. 


6  TRUSTS,    POOLS   AND   CORPORATIONS 

Five  years  passed  before  a  thoroughly  effective  union  could 
again  be  made.  Smaller  organizations  were  formed  to  sell  salt 
for  groups  of  manufacturers,  notably  the  Saginaw  Salt  Associa- 
tion and  the  Michigan  Salt  Association ;  but  the  competition 
was  fierce,  prices  went  steadily  down,  and  the  weaker  companies 
found  themselves  in  need.  At  length,  after  low  and  declining 
prices  throughout  the  year  1875,  the  time  seemed  ripe  for 
another  organization  which  could  control  the  sale  of  a  large 
proportion  of  the  Michigan  salt,  and  through  this  added  power 
of  union  both  secure  a  saving  in  the  expenses  of  sale  and  trans- 
portation, and  either  compete  more  effectively  with  the  New 
York  and  Ohio  river  manufacturers  or  force  them  into  a  union 
which  should  control  the  whole  American  product.  January  8, 
1876,  J.  E.  Shaw,  president  of  the  Michigan  Salt  Association  (a 
smaller  combination  of  manufacturers),  issued  a  circular  address 
to  the  salt  manufacturers  of  Michigan,  calling  a  meeting  to  be 
held  at  Bay  City,  January  20,  to  effect  such  an  organization,  if  it 
should  be  possible.  The  address  exhibits  in  an  almost  pitiable 
light  the  situation  of  the  manufacturers,  and  urges  strongly  the 
need  of  organization.  Mr.  Shaw  declared  : 

The  old  adage,  "  in  union  there  is  strength,"  is  true  wherever  you 
apply  it,  and  in  manufacture  of  salt  there  is  no  exception.  To  secure 
this  union  with  its  attendant  strength  is  the  object  of  the  Michigan  asso- 
ciation. This  is  the  object  it  had  in  view  when  it  was  organized,  and 
this  is  the  object  it  has  in  view  to-day.  That  the  organization  has  re- 
mained inactive,  is  attributable  to  the  fact  that  it  could  not  secure  con- 
trol of.  a  sufficiently  large  percentage  of  the  state  product  to  warrant 
[aggressive  action],  a  few  manufacturers  declining,  for  reasons  best 
known  to  themselves,  to  enter  the  association.  And  what  was  the  result? 
Salt  has  depreciated  in  value,  dropped  steadily  down,  until  to-day  it  has 
no  market  price  on  the  Saginaw  river,  and  is  quoted  at  only  $1.27  in 
Chicago,  and  M.oo  in  Toledo.  That  the  experience  of  '75  will  be  that 
of  each  succeeding  year,  unless  something  is  done  to  check  the  general 
demoralization,  cannot  be  gainsaid.  The  oldest  manufacturers  of  the 
Syracuse,  Kanawha,  and  Ohio  districts,  tell  us  that  their  experience,  dat- 
ing back  forty  years  in  some  cases,  has  a/u>a\s  been  this:  "Organized 
IL'C  have  prospered.  Unorganized  we  hare  nof."  This  is  the  experience 
which  we  have  been  buying  and  paying  dearly  for.  .  .  .  The  trouble  lies 
in  the  marketing  of  the  product.  Each  man  has  taken  care  of  (or 


THE    MICHIGAN    SALT   ASSOCIATION  7 

attempted  to)  his  own  product.  .  .  .  The  other  salt  districts  of  the 
United  States  are  now  organized,  and  are  ready  to  treat  with  us  (as  soon 
as  we  have  an  association)  relative  to  fixing  and  maintaining  prices, 
dividing  the  territory,  and  making  other  arrangements  which  will  inure 
to  the  advantage  of  the  trade.  But  we  must  first  be  organized.  They 
cannot  treat  with  individuals. 

The  appeal  was  successful.  The  meeting  was  held ;  others 
followed ;  and  in  April  the  Saginaw  Salt  Company  and  the 
Michigan  Salt- Association  were  consolidated  and  other  outside 
firms  were  taken  in,  so  that  from  the  beginning  more  than  85 
per  cent  of  the  product  of  the  state  was  controlled.  The  new 
association  took  the  name  of  The  Michigan  Salt  Association. 

When  in  1881  the  association  expired  by  limitation,  it  was 
immediately  reorganized  under  the  name  of  The  Salt  Associa- 
tion of  Michigan  ;  and,  in  1886,  again  expiring  by  limitation,  it 
was  again  organized  under  its  former  name.  The  three  associa- 
tions have  been,  in  fact,  the  same  association  under  different 
names;  the  president  and  secretary  elected  in  1876  still  hold 
their  offices,  and  the  business  is  conducted  on  the  same  prin- 
ciples, slight  changes  only  having  been  made  in  the  articles  of 
association  and  by-laws. 

The  organization  of  the  association,  effective  as  it  is,  is  very 
simple.  Less  than  a  page  contains  the  articles  of  association, 
which  declare  that  the  purpose  of  the  association  is  "  the  manufac- 
ture and  dealing  in  salt,"  and  the  "transportation  of  its  products 
to  market  "  ;  that  the  amount  of  capital  stock  shall  be  $200,000, 
divided  into  $25  shares,  of  which  the  amount  actually  paid  in 
is  two  dollars  per  share  ;  that  its  affairs  shall  be  managed  by  a 
board  of  nineteen  directors  (of  whom  not  more  than  one  shall 
be  from  the  same  firm  or  company  of  manufacturers)  chosen  by 
the  stockholders  ;  that  the  offices  for  transaction  of  business 
shall  be  in  East  Saginaw  and  Bay  City,  and  that  the  business 
shall  be  carried  on  in  the  salt-manufacturing  counties ;  and, 
finally,  that  the  association  shall  exist  as  a  corporation  for  the 
period  of  five  years. 

From  the  by-laws,  we  learn  that  the  stockholders  shall  be 
manufacturers  of  salt,  and  that  the  number  of  shares  taken  by 
any  one  "  shall  not  exceed  one  share  of  the  capital  stock  for 


8  TRUSTS,   POOLS  AND   CORPORATIONS 

every  barrel  of  the  average  daily  capacity  of  his  manufactory  on 
a  fair  estimate  "  —  an  excellent  provision  to  prevent  manipulation 
of  stock  to  the  detriment  of  the  real  business. 

An  annual  dividend  of  seven  per  cent  payable  semi-annually 
on  the  amount  of  stock  actually  paid  in,  together  with  the  losses, 
costs  and  expenses  incurred  in  handling  and  selling, .including 
the  state  inspection  fees,  is  deducted  from  the  proceeds  of  sales 
before  division  is  made. 

That  the  business  management  of  the  association  may  be  as 
personal  and  direct  as  possible,  the  president  is  given  the  gen- 
eral supervision  of  the  entire  business,  subject  to  the  general 
rules  laid  down  by  the  board  and  the  executive  committee.  A 
secretary  and  a  treasurer  with  the  usual  duties  of  such  officers 
are  appointed  by  the  board,  and  also  an  executive  committee, 
which  has  general  control  and  is  charged  with  the  duty  of  audit- 
ing all  accounts,  inspecting  all  books,  etc.,  at  least  once  a  month. 
The  officers  receive  a  stipulated  salary.  The  organization,  it 
will  be  seen,  is  such  that  the  executive  efficiency  of  a  single 
head  is  combined  with  all  proper  checks  to  guard  against  any 
abuse  of  trust  on  the  part  of  any  of  the  officers.  The  fact  that 
the  chief  officers  of  the  association  have  held  their  positions 
since  its  organization,  and  the  continued  prosperity  of  the  asso- 
ciation, never  greater  than  now,  reflect  the  greatest  credit  on 
the  management  as  well  as  on  the  authors  of  the  plan. 

The  relations  of  the  association  with  the  members,  however, 
constitute  the  main  point  of  interest.  A  contract  is  made  every 
year  with  each  manufacturer  who  wishes  to  become  a  member, 
in  accordance  with  Article  vii  of  the  by-laws,  which  reads  as 
follows  : 

Every  manufacturer,  in  becoming  a  member  of  this  association,  shall 
execute  and  deliver  to  it  a  contract  for  all  salt  manufactured  by  him  or 
them,  or  a  lease  of  his  salt-manufacturing  property,  including  all  appa- 
ratus and  appurtenances  thereunto  belonging,  for  the  purpose  of  manu- 
facturing. Such  contract  or  lease  shall  be  for  the  term  of  one  year,  or 
until  the  dissolution  of  the  association,  and  shall  not  impose  any  restric- 
tion that  will  prevent  the  manufacture  of  salt  at  any  and  all  times. 

Each  and  every  contractor  shall  manufacture  salt  for  this  association 
on  the  terms  and  conditions  as  follows  : 


THE   MICHIGAN    SALT   ASSOCIATION  9 

That  he  will  make  salt  solely  on  the  association's  account,  of  the  best 
quality  of  the  kind  manufactured  by  him,  according  to  the  conditions 
of  his  contract  or  lease. 

The  contracts  provide,  further,  that  in  case  the  manufacturer 
sells  salt  on  private  account,  he  shall  pay  to  the  association  ten 
cents  for  every  barrel  so  sold  ;  that  the  contract,  however,  is  not 
thereby  forfeited,  but  remains  in  force  throughout  the  stipulated 
time. 

While  this  gives  full  control  of  the  product  to  the  association, 
and  effectually  prevents  all  competition  among  the  manufac- 
turers, the  provision  that  no  restriction  shall  be  imposed  which 
will  prevent  the  manufacture  of  salt  at  any  and  all  times,  oper- 
ates powerfully  against  any  raising  of  prices  to  exorbitant  rates 
such  as  might  perhaps  be  secured  otherwise,  if  combination  with 
the  New  York  and  Ohio  river  manufacturers  could  be  effected. 
The  reason  that  this  clause  stands  in  the  by-laws,  and  that  the 
practice  of  the  association  differs  so  entirely,  on  this  point,  from 
that  of  the  anthracite  coal  syndicate  and  other  combinations  of 
like  character,  is  found  in  the  peculiarity  of  the  manufacture. 
A  great  part  of  the  larger  salt  blocks  are  run  in  connection  with 
saw-mills  ;  and  the  slabs,  sawdust,  etc.,  from  the  mills  are  used 
for  barrels  and  fuel.  Not  only  would  this  material,  if  not  so 
used,  be  a  dead  loss,  but  its  removal  would  be  a  source  of  ex- 
pense. Manufacturers  so  situated  could  never  expect  a  rise  in 
the  price  of  salt  sufficient  to  compensate  them  for  the  loss  that 
would  be  incurred  in  stopping  their  works  ;  and  consequently 
they  will  not  join  the  association  unless  assured  that  they  will 
not  be  subjected  to  such  a  loss  and  inconvenience  in  their  more 
important  business. 

Another  provision  of  great  advantage,  especially  to  the  manu- 
facturer of  comparatively  small  capital,  is  that  which  provides 
for  an  advance  of  money  on  all  the  salt  inspected  each  month, 
whether  the  salt  is  taken  from  the  bins  and  sold  or  not,  if  the 
manufacturer  wishes  such  advance  and  is  willing  to  pay  interest 
on  it.  The  rate  of  advance  and  the  rate  of  interest  are  fixed  by 
the  board  and  may  be  changed  from  time  to  time  ;  but  liberality 
is  ahvavs  shown  both  in  the  amount  advanced  and  in  the  rate  of 


10  TRUSTS,    POOLS   AND   CORPORATIONS 

interest.  The  advance  has  been  lately  25  cents  per  barrel  in  the 
bins,  or  45  cents  per  barrel  if  packed,  with  interest  at  7  per  cent. 
Money  may  be  loaned  in  the  state  at  10  per  cent,  and  this  rate 
is  often  obtained  on  small  sums  for  short  periods  of  time. 

The  salt  becomes  the  property  of  the  association  as  soon  as 
inspected ;  but  the  manufacturer  is  still  bound  to  deliver  it  free 
of  charge  on  the  wharf  or  on  the  cars,  as  the  association  shall 
direct,  and  to  sustain  all  losses  by  fire  or  otherwise,  if  they 
occur  before  such  delivery.  The  association  agrees  on  its  part 
to  remove  within  a  reasonable  time  all  the  salt  manufactured. 

Reports  are  rendered  every  month  to  each  member  of  the 
association,  giving  not  merely  his  own  special  account,  but  all 
the  sales,  with  the  average  price  both  gross  and  net,  and  all  the 
necessary  expenses  with  principal  items  — average  freight,  com- 
mission, home  and  storage  charges,  etc.  All  the  members  receive 
credit  at  the  same  average  rate,  and  for  an  amount  proportioned 
to  their  manufacture  as  shown  by  the  inspection  —  a  provision 
greatly  to  the  advantage  of  the  poorly  situated  companies.  The 
receipts  of  salt  for  each  month  are  sold  and  accounted  for 
separately. 

The  association  keeps  its  agents  —  most  of  them  selling  on 
commission,  but  some  on  salaries  —  in  Chicago,  St.  Louis,  Cin- 
cinnati, Cleveland,  Columbus,  Duluth,  Detroit,  Milwaukee  and 
other  places,  wherever  this  is  warranted  by  the  amount  taken. 

It  will  perhaps  be  well,  further,  to  notice  some  attempts  that 
have  been  made,  since  the  manufacture  of  salt  in  Michigan 
became  a  leading  industry,  to  form  combinations  of  all  the  lead- 
ing manufacturers  in  the  country,  and  thereby  to  secure  from 
consumers  a  price  limited  only  by  the  competition  of  foreign 
salt  and  the  lessened  demand  consequent  on  the  rise  in  price. 

Not  many  months  after  the  Saginaw  and  Bay  association  was 
formed  (April,  1868),  the  managers  began  negotiations  with  the 
manufacturers  in  New  York  and  in  the  Ohio  river  district.  This 
first  attempt,  instead  of  resulting  as  had  been  hoped,  led,  from  a 
rather  peculiar  combination  of  circumstances,  to  an  even  fiercer 
competition  than  had  existed  before. 

The  president  of  the  association  gives  the  facts  in  his  report 
of  1870  to  the  board  of  directors.  The  association  in  Michigan 


THE    MICHIGAN    SALT   ASSOCIATION  1 1 

succeeded  in  making  terms  with  the  Onondaga  Salt  Company, 
but  failed  with  the  Ohio  river  association,  because  the  latter 
could  not  control  the  product  of  their  district  either  as  to  quan- 
tity or  price.  Some  new  works  at  Pomeroy,  it  seemed,  had 
refused  to  join  the  Ohio  river  association.  The  other  manu- 
facturers of  that  district,  having  sold  all  their  product  to  the 
association  at  a  fixed  price,  increased  their  output  and  flooded 
the  market.  As  the  association  could  not  control  the  works  at 
Pomeroy,  there  was  a  general  cutting  of  prices  in  which,  of 
course,  Michigan  and  New  York  were  compelled  to  join.  As 
the  eloquent  writer  puts  it :  "  It  was  a  Donnybrook  Fair  in  the 
salt  market.  When  you  saw  a  head,  you  hit  it."  The  imme- 
diate result  was,  naturally,  detrimental  to  all  the  works.  The 
final  outcome  was  that  the  outsiders  on  the  Ohio  river  joined  the 
association,  and  a  change  in  the  character  of  the  contract  with 
the  former  members  enabled  that  association  to  control  the 
quatitity  as  well  as  the  price  in  that  quarter.  This  being  done, 
it  became  an  easy  matter  to  make  the  combination  general. 
The  Washington  correspondent  of  TJic  Cliicago  Tribune  gave  an 
account  of  the  pool  which  is  corroborated  by  other  papers  and 
by  officers  of  the  present  Michigan  association.  The  Syracuse, 
the  Ohio,  and  the  Saginaw  and  Bay  companies  entered  into  an 
agreement  at  Detroit,  March  22,  1871, 

To  make  a  pool  of  all  the  salt  in  the  market  in  the  territory  bounded  by 
the  lakes  on  the  North  and  Hast  and  by  the  Ohio  river  on  the  South,  the 
western  and  southwestern  boundary  to  be  entirely  discretionary,  accord- 
ing to  the  prices  of  freights  to  places  whence  orders  for  this  article  might 
be  sent.  This  discretion  was  confided  in  a  board,  there  appointed, 
which  consisted  of  one  representative  from  each  of  the  three  salt  cor- 
porations, who  are  also  empowered  to  fill  orders  and  forward  all  supplies, 
to  advance  or  reduce  prices  as  occasion  may  require.  The  percentage 
of  the  pool,  and  all  future  supplies  and  profits  under  existing  arrange- 
ments, were  agreed  to  as  follows  :  Syracuse,  40  per  cent ;  Ohio  river.  32 
per  cent  ;  Saginaw.  28  per  cent.1 

The  prices  fixed  were  82.00  per  barrel  for  Chicago,  Cincin- 
nati, Cleveland  and  Detroit;  S2.io  for  Toledo;  and  52.40  for 
St.  Louis. 

1  Tlu  C///<wsv  TrU-nnc,  April  4,  1871. 


12  TRUSTS,   POOLS  AND   CORPORATIONS 

Reference  to  Table  II  (see  page  15)  will  show  the  effect  of 
the  "  Donnybrook  Fair  "  period,  as  well  as  the  rise  in  price  con- 
sequent on  the  pool  in  1871.  The  Chicago  prices  of  the  first  of 
January  show  the  effects  of  both  movements,  as  do  also  the 
average  prices  at  Saginaw.  Gold  prices  show  a  less  decrease, 
but  emphasize  the  rise  in  1871-2.  At  the  close  of  1871,  as  we 
have  seen,  the  Saginaw  and  Bay  association,  having  lost  con- 
trol of  a  large  proportion  of  the  Michigan  men,  could  not 
uphold  their  end  of  the  bargain.  As  they  were  not  bound, 
however,  to  take  at  a  fixed  price  any  large  product,  no  such 
immediate  cutting  of  prices  followed  as  had  been  seen  the  year 
before. 

A  somewhat  more  firmly  controlled  pool  was  made  ten  years 
later  to  cover  about  the  same  territory.  A  special  arrangement 
was  made  with  the  Ohio  river  manufacturers,  the  exact  terms 
of  which  cannot  be  given ;  but  they  are  of  little  consequence, 
since  by  far  the  larger  part  of  the  amount  was  sold  by  the 
other  companies. 

The  territory  covered  was  bounded  on  the  east  by  a  line 
drawn  north  and  south  through  Buffalo,  and  on  the  south  by  the 
Ohio  river,  as  before.  The  importance  of  the  Michigan  product, 
relatively  speaking,  is  worthy  of  special  notice.  In  1871,  as  we 
have  seen,  Michigan  put  in  28  per  cent ;  Ohio  river,  32  per 
cent;  and  New  York,  40  per  cent.  In  1881,  Michigan  put  in 
|-|-  and  New  York  T2T,  while  some  special  arrangement  regarding 
a  small  fixed  number  of  barrels,  or  a  fixed  rate,  was  made  with 
the  Ohio  company.  The  management  of  the  pool,  as  before, 
was  confided  to  a  committee  selected  from  both  companies. 
The  contract  went  into  effect  May  i,  1881,  and  was  terminated 
March  I,  1882,  a  month's  notice  having  been  given  by  the  Mich- 
igan association  in  accordance  with  the  terms  of  the  contract. 
The  effect  of  the  pool  on  prices  is  shown  in  Table  III  (page  16). 
The  cause  for  the  breaking  of  the  pool,  and  the  following  sudden 
lowering  of  prices,  is  stated  by  the  managers  of  the  association 
to  be  simply  that  the  markets,  especially  Chicago,  had  become 
overstocked  with  salt,  and  the  Michigan  association  felt  the 
need  of  having  full  control  there.  They  broke  the  pool,  and 
"  slaughtered  the  market." 


THE    MICHIGAN    SALT   ASSOCIATION  13 

Though  other  combinations  have  been  talked  of  at  times,  no 
other  has  been  made. 

Such,  in  brief,  is  the  history  and  the  plan  of  organization  of 
The  Michigan  Salt  Association.  It  remains  to  consider  some- 
what more  fully  its  economic  effects. 

First,  much  credit  must  be  given  the  association  for  the 
improvement  of  the  quality  of  the  salt  manufactured  in  the 
state.  The  necessity  for  a  rigid  system  of  inspection  to  keep 
up  the  quality  of  the  product  and  prevent  injury  to  the  reputa- 
tion of  Saginaw  salt  in  the  market,  led  the  old  Saginavv  and  Bay 
Salt  association  to  appoint  a  committee  in  1868  to  draft  a  law 
meeting  the  wants  of  the  salt  manufacturers.  As  early  as  1865 
a  system  of  local  inspection  had  been  adopted  by  a  number  of 
manufacturers,1  but  something  more  rigid  was  required ;  and 
this  bill,  which  became  a  law  in  March,  1869,  was  the  result. 
As  amended  in  1875,  it  remains  to-day  in  the  statute  book,  and 
to  it  is  doubtless  due  in  large  measure  the  superior  quality  of 
the  Michigan  salt. 

The  inspector  is  appointed  by  the  governor  and  senate,  is 
paid  a  stated  salary  by  the  state,  and  is,  of  course,  entirely  inde- 
pendent of  the  manufacturers.  The  state  is  divided  into  as  many 
districts  as  seem  to  him  practicable  for  the  thorough  carrying- 
out  of  the  work,  and  all  salt  made  is  carefully  inspected,  a  deputy 
inspector  visiting  each  block  every  day  for  this  purpose.  The 
early  association  deserves  the  credit  of  securing  this  effective 
law.  Some  manufacturers,  it  is  true,  attempt  at  times  to  evade 
the  law  and  to  pass  off  an  inferior  grade  of  salt  for  the  best ;  but 
the  larger  manufacturers,  and  of  course  the  Salt  association,  are 
interested  in  having  the  grade  of  salt  kept  up,  and  therefore 
assist  the  work  of  inspection  as  much  as  possible. 

The  question  which  next  suggests  itself  —  that  of  the  influ- 
ence of  the  association  upon  prices  and  profits — -cannot  be 
answered  so  briefly.  In  many  of  the  markets  it  is  clear  that 
the  association  is  really  without  competition  as  long  as  it  keeps 
its  prices  reasonably  low,  or  perhaps  we  had  better  say,  only 
moderately  high.  The  effective  competition  of  Xew  York — 
or  even  that  of  anv  Michigan  manufacturers  who  are  "running 


14  TRUSTS,    POOLS   AND   CORPORATIONS 

wild"  —  is  practically  out  of  the  question.  It  must  not  be  for- 
gotten that  the  average  cost  of  manufacture  in  Michigan  is 
considerably  less  than  in  New  York ;  and  though  westward- 
bound  freights  are  low,  they  are  still  worthy  of  consideration. 
Of  course  no  single  manufacturer  could  escape  competition  to 
so  great  an  extent,  since  his  neighbors  would  be  his  strongest 
competitors.  Again,  by  means  of  its  thorough  organization  and 
the  daily  reports  sent  to  the  home  office  by  agents  in  all  im- 
portant markets,  the  association  is  able  to  make  sales  not  merely 
more  advantageously  as  regards  price,  but  also  with  a  much 
less  expense  in  the  way  of  commissions,  travel,  number  of 
agents,  etc.  Besides  this,  the  freedom  from  care  and  responsi- 
bility and  the  certainty  that  the  product  is  in  hands  that  will 
make  the  most  of  it,  is  worth  not  a  little  to  the  average  manu- 
facturer. The  last-named  item  alone,  that  of  greater  intelli- 
gence and  knowledge  of  the  market,  should  receive  more 
consideration  than  the  manufacturer  usually  gives  it. 

Another  point  of  advantage  is  this  :  by  means  of  its  large  sales 
and  long  experience,  the  association  can  reduce  losses  from  bad 
debts  to  a  lower  figure  than  could  individual  manufacturers. 

Further,  when  the  sales  are  all  made  from  a  central  point, 
with  a  right  to  deliver  from  any  of  the  manufactories  at  will,  it 
is  clear  that  a  large  saving  in  transportation  can  be  made.  Con- 
tracts will  be  filled  always  from  the  works  most  favorably  situ- 
ated. Vessels  and  cars  can  be  secured  at  such  times  and  places 
as  will  enable  them  to  carry  at  the  lowest  rates.  The  average 
rate  of  freight  is  thereby  much  lessened. 

The  plan  of  advancing  a  large  part  of  the  value  of  the  salt  to 
the  manufacturer  before  the  salt  is  sold,  enables  him  to  carry  on 
his  business  with  less  capital  than  would  be  required  if  he  were 
not  a  member  of  the  association. 

The  first  consideration,  the  abolition  of  competition,  comes 
solely  to  the  benefit  of  the  manufacturer  ;  the  others  mentioned 
are  advantages  from  organization  which  lessen  the  cost  of  pro- 
duction, —  including  sales  and  transportation,  —  and  may  benefit 
either  the  manufacturer,  through  greater  profits,  or  the  consumer, 
through  lower  prices,  or  the  benefit  may  be  divided. 

A  study  of  prices  before  the  formation  of  the  association,  and 


THE   MICHIGAN    SALT   ASSOCIATION  15 

after,  would  seem  to  show  that  while  the  saving  had  chiefly  bene- 
fited the  manufacturer,  as  was  to  be  expected,  the  consumer  had 
not  suffered  seriously. 


TABLE   II 


PRICE  or  SALT  PER  BAKKKI,  IN  SAGINAW  AND  CHICAGO 


YEAR 

SAGINAW 

CHICAGO 

YEAR 

SAGINAW 

CHICAGC 

1860,  January  I, 

$1-50 

1875,  average, 

$1.10 

1  86  1,  Jan.    , 

I.75@  2.00 

1876,  Jan.  I, 

$1.35 

1862,  Jan.    , 

2.25 

1876,  average, 

1.05 

1863,  Jan.    , 

2.25 

1877,  Jan.  I, 

1.40 

1864,  Jan.     , 

2.IO@  2.15 

1877,  average, 

•85 

1865,  Jan.    , 

2-75 

1878,  Jan.  I, 

I.IO 

1866,  Jan.    , 

2.35^,2.40 

1878,  average, 

.84 

1866,  average, 

$1.80 

1879,  Jan.  I, 

I.IO 

1867,  Jan.  i, 

2.40(^2.45 

1879,  average, 

i.  02 

1867,  average, 

1.77 

1880,  Jan.  i, 

1.45 

1868,  Jan.  i, 

3-25 

1880,  average, 

•75 

1868,  average, 

1.85 

1881,  Jan.  i, 

1.05 

1869,  Jan.  I, 

2.60 

1  88  1,  average, 

•83! 

1869,  average, 

1.58 

1882,  Jan.  i, 

1.35 

1870,  Jan.  i, 

2.25  @  2.30 

1882,  average, 

.70 

1870,  average, 

1-32 

1883,  Jan.  i, 

1.  00 

1871,  Jan.  i, 

2.05  Q_i  2.10 

1883,  average, 

.81 

1871,  average, 

1.46 

1884,  Jan.  I, 

1.15 

1872,  Jan.  I, 

2.35  ©2.40 

1884,  average, 

-r  2 

•7:>3 

1872,  average, 

1.46 

1885,  Jan.  i, 

•95 

1873,  Jan.  i, 

2.40 

1885,  average, 

.70 

1873,  average, 

1.37 

1886,  Jan.  i, 

•95 

1874,  Jan.  i, 

1.90 

1886,  average, 

.66 

1874,  average, 

1.19 

1887,  Jan.  I, 

.80 

1875,  Jan.  I, 

1.65 

1887,  average, 

•572 

Table  II  shows  that,  while  the  prices  have  on  the  whole 
tended  downward  since  1876,  the  time  of  the  formation  of  the 
association,  the  rate  of  decrease  has  been  somewhat  less  rapid. 
On  the  other  hand  it  must  be  noted  that  the  prices  in  the  earlier 
years  are  reckoned  in  legal  tender  notes.  This  causes  the  prices 
during  the  sixties,  and  the  rate  of  decrease  during  the  years  pre- 
ceding resumption,  to  appear  greater  than  they  really  were, 
though  a  slight  check  in  the  rate  of  decrease  can  be  seen  even 
when  prices  are  reckoned  in  gold.  The  influence  of  the  war, 
too,  in  pushing  the  price  to  what  was  really  an  abnormal  height, 
must  not  be  overlooked.  The  improved  methods  of  manutac- 


i6 


TRUSTS,   POOLS  AND   CORPORATIONS 


ture  would  naturally  cause  a  lowering  of  price,  and  it  is  impos- 
sible to  accurately  judge  the  influence  of  all  the  factors.  The 
earlier  prices,  of  course,  were  not  determined  to  any  marked 
extent  by  the  Michigan  product,  as  the  manufacture  in  the  state 
began  in  1860,  and  was  not  really  on  an  even  footing  with  New 
York  for  several  years.  It  seems  probable,  however,  that  the 
association  checked  somewhat  the  tendency  toward  a  lower  price, 
and,  if  so,  the  consumer  is  so  much  the  worse  off.  This  differ- 
ence in  price  cannot  on  the  whole  have  been  much,  the  chief 
advantage  to  the  manufacturer  coming,  probably,  from  the  les- 
sened cost  of  putting  his  product  on  the  market. 

It  is,  again,  quite  probable  that  without  the  association,  the 
larger  dealers  would  take  part  of  the  profit  which  now  goes  to 
the  manufacturer,  and  that  the  consumer  would  be  forced  to 
pay  as  much  as  now,  and  even  more.  Certain  it  is  that  large 
dealers  in  Chicago,  Toledo,  Cleveland  and  Sandusky  express 
themselves  generally  as  opposed  to  any  association,  even  when 
they  have  been  appointed  agents.  At  present  they  receive  a 
low  commission  per  barrel  of  salt  sold ;  whereas,  before  the 
formation  of  the  association,  they  could  buy  salt  in  the  summer 
months  when  it  was  very  plentiful,  and  store  it  till  after  the 
close  of  navigation,  and  then  the  few  larger  dealers  in  such  an 
important  market  as  Chicago,  by  uniting,  could  advance  the 
price  enough  to  reap  a  handsome  profit.  This  practice,  which 
was  common,  came  to  the  benefit  of  the  few  dealers,  while 
neither  the  manufacturer  nor  the  consumer  received  any  share. 


TABLE   III 


ASSOCIATION  PRICE  OF  SALT  KACII  MONTH,  FROM  JTXK,  1877,  TO  NOVEMBER,  1887 l 


Feb.  1878 70    I  Oct.   1878  . 


1  Prices  given  are  for  the  sales  uf  the  preceding  month. 


THE   MICHIGAN    SALT   ASSOCIATION 


TABLE  III— Continued 


June  1879  . 

.      .     .80 

April  1  882     .     . 

.71 

Feb.  1885     .     .     .    . 
March  " 

.69 

68 

July      "      .     . 
Au".     " 

.     .     .86 

.     .     .88 

Mav      "        .     . 

72 

June      " 

.70     Anril     "         ... 

.66 

Sept.    "      .     . 

.QO 

July      "         .     . 
An-,'.     "        .     . 

.      .      .70 
.70 

May      " 

.6* 

Oct.      "      .     . 
\»>v.     "      .     . 

•     •     -94 
.02 

June     "         . 
lulv      " 

.62 
.60 

Sent.     " 

.6<> 

Dec       "      .     . 

.0; 

Oct.       "         .      . 

.69 

Aug.     " 

.60 

Jan.    iSSo  .      . 
Feb.       "        .      . 

.     .     .05 
.     .     .08 

\ov.      "         .      . 

.69 

Sept.     "        .     .     .     . 

.6c 

Dec.      "         .     . 

-7O 

Oct.       "        .     .     .     . 

.70 

March  "      .     . 
April    "      .     . 
May      "      .     . 

.     .     .09 
.     .     .05 
.8q 

Jan.    iSS3     .     . 
Feb.      "         .     . 

.     .     .70 

.70 

Xov.     "        .     .     .     . 

.72 

Dee.      "        .     .     .     . 

.72 

March  "         .      . 
•Vpril     " 

.     .     .70 

.70 

Jan.    1886     .     .     . 

.71 

June     " 
July      "       .      . 
Au<T.     " 

.    .    .72 
.    .    .72 

Feb.      "        ... 

.72 

May      "        '     . 
June     " 

•     •     -75 
.     .     .So 

March  "        ... 

.71 

April    "         ... 

.70 

Sent.    " 

Julv       "         .     . 

.     .     .80 

May      "        ... 
Tune      " 

.69 

.68 

Oct        " 

An"      "         .     . 

80 

Xnv.      "        .       . 
Dec.      "       .      . 

.72 
.72 

Sept.     " 

.     .     .80     fulv      "        ... 

.66 

Oct.      •'        .     . 

.81     Aug.     "        ... 

.6; 

Jan.    iSSi    . 
Feb.      "      .     . 
March  "      .     . 
April     "      . 

•    •    -74 

•     •     -77 
•     •     -77 
.76 

Xov      '• 

83      Sent.      "           ... 

.6; 

Dec      " 

.8; 

Oct.      "        ... 

.6? 

Jan.    1884     . 
Feb.      "         .      . 
March  "         .     . 
April    " 

•     •     -83 
.     .     .83 
.     .     .83 
8; 

Xov.     ••<        ... 
Dec.      "        ... 

.60 
.60 

Mav      "      .     . 

.70 

Jan.    1887     .     .     . 

Feb.       " 

.60 
.60 

June      " 
"lulv       "       .      . 

.     .     .76} 
Si  ' 

Mnv      " 

.So     March  "         ... 

.s7 

Ail".     "       .      . 

.     .     .88.',     June     "         .     . 

.74     April     "         ... 

Sent      " 

.       .       -9''1,      Tnlv        "           -       . 

.      .      .72     Mnv      " 

Oct.       "       .      . 
\uv.      "       .      . 

•     •     -94 
•9  1 

Au".     "         .     . 

.71 

I  une      ''         ... 

"lulv       " 

•53 
.:  i 

Sept.    '•        .     . 

.70 

Dec.      "       .      . 
Jan.    iSS2   .      . 
Feb.       -       .      . 

•     •     -95 
•     •     -94 
99 

Oct.       "        .     . 

.70     Aiu"-.      "         ... 

.17 

Xov.     "        .     . 

.70 

Sept.     "         ... 
Oct.       " 

•58 

60 

Dec.       " 

69 

March  "      .     . 

.     .     .99      Jan.    ioS^     .     . 

.     .     .68  .  Xov.     "        ... 

.62 

Table  III,  giving  the  average  monthly  prices  of  the  associa- 
tion (the  net  prices  paid  to  manufacturers),  shows,  on  the  whole, 
a  decline;  but  one  not  so  great  after  all,  when  one  considers 
the  general  tendency  of  prices  of  all  manufactured  products. 
Moreover,  there  are  several  times  when  the  price  has  gone  up 
enough  to  counterbalance  in  great  part  the  decline. 

Besides  the  statements  of  reliable  manufacturers  regarding 
their  profits,  a  comparison  of  the  table  of  prices  with  the  table 
showing  the  amount  produced  in  different  years  in  Michigan 


1 8  TRUSTS,   POOLS  AND   CORPORATIONS 

gives  us  still  further  reason  for  the  belief  that  the  association 
cannot  secure  prices  which  make  the  profits  at  all  extraordinary. 
A  distinctly  marked  rate  of  increase  (not  absolute  increase)  or 
falling  off  in  production  usually  follows,  especially  in  later 
years,  like  changes  in  the  average  yearly  price.  One  should 
not  lay  too  much  stress,  however,  upon  such  similarities,  as 
there  are  many  other  determining  factors. 

Many  of  the  advantages  to  manufacturers  of  such  an  associa- 
tion, especially  the  freedom  from  competition  with  one's  neigh- 
bors, cannot  be  secured  unless  a  very  large  proportion  of  the 
manufacturers  of  the  state  are  united.  The  association  aims, 
of  course,  to  have  as  many  join  as  possible ;  and  in  case  of 
necessity  it  does  not  hesitate  to  "squeeze"  a  manufacturer 
whose  block  is  so  situated  that  he  has  no  need  of  the  associa- 
tion, and  whose  competition  is  troublesome.  This  brings  to 
our  notice  the  disadvantage  it  might  be  to  some  manufacturers 
to  become  members.  As  the  prices,  freight  charges,  etc.,  are 
arranged  for  the  whole  association,  the  manufacturer  who  has 
a  ready  market  near  at  hand  could  oftentimes  realize  somewhat 
more  by  remaining  outside. 

In  the  year  1886,  about  600,000  barrels  of  Michigan  salt 
were  sold  by  outsiders.  The  amount  was  large  enough  to 
make  a  real  competition  that  could  be  severely  felt  by  the 
association.  At  length,  the  managers  issued  the  order  to  their 
agents  to  meet  any  rates,  however  low  they  might  run.  Table 
III  shows  the  gradual  decrease,  as  the  fight  went  on.  In 
August,  1887,  the  unprecedentedly  low  price  of  50  cents  per 
barrel  was  reached.  In  the  same  month  manufacturers  repre- 
senting some  350,000  to  400,000  barrels,  yearly  product,  joined 
the  association ;  and  \ve  note  the  consequence  in  the  rise  of 
price  to  57  cents  for  that  month's  product,  while  the  prices  for 
the  following  three  months  (58,  60,  and  62  cents)  still  show  the 
upward  tendency. 

It  has  been  impossible  to  obtain  with  any  degree  of  accuracy 
the  data  which  would  indicate  the  influence  of  the  competition 
within  the  state  ;  namely,  the  times  of  the  accession  of  different 
manufacturers  to  the  association  and  of  their  withdrawal  from  it. 
As  the  contracts  are  made  yearly,  some  enter  the  association 


THE   MICHIGAN    SALT   ASSOCIATION  19 

and  others  leave  it  every  year.  In  one  or  two  instances,  how- 
ever, the  effect  of  such  changes  is  marked.  Reference  to  Table 
III  shows,  in  1880,  a  sudden  decline  in  price  from  $1.09  to  72 
cents  within  three  months.  This  is  probably  to  be  explained  by 
the  fact  that  "  a  large  number  of  the  manufacturers  went  out 
March  i,  and  that  they  commenced  cutting  prices,  and  we  [the 
association]  concluded  to  more  than  meet  them."  1  The  sudden 
drop  in  prices  in  the  early  part  of  1882  followed  the  breaking  of 
the  pool  with  New  York.  The  rise  in  August,  1887,  is  due,  as 
noted  above,  to  the  accession  of  a  number  of  manufacturers. 
It  should  rather  be  called  the  setting  back  of  the  price  toward 
that  obtained  before  the  cutting  to  force  the  manufacturers  in. 
Doubtless,  too,  many  of  the  other  changes  noticed  are  to  be 
ascribed  to  the  same  causes. 

When  a  barrel  containing  280  Ibs.  of  fine  salt  of  the  first 
quality  can  be  bought  in  the  Chicago  market  at  a  price  ranging 
from  75  to  85  cents,  there  is  not  likely  to  be  very  much  com- 
plaint on  the  part  of  consumers,  nor  much  talk  about  "  monop- 
olies," "coalitions  for  robbing  the  people,"  etc.;  and  yet  the 
Michigan  Salt  Association  is  sometimes  attacked  as  a  monopoly, 
and  it  doubtless  has  some  of  the  features  of  one.  Adolph 
Wagner  is  strongly  inclined  to  recommend  the  manufacture  of 
salt  by  the  state,  on  account  of  the  danger  of  so  common  an 
article  of  consumption  being  monopolized  by  the  manufacturers 
and  dealers.2  The  advisability  of  state  control  seems  to  him, 
on  the  whole,  greater  than  in  the  case  of  the  coal  industry. 
Our  experience  with  anthracite  coal  companies  within  the  past 
few  years  has  been  such  that  we  may  well  note  the  circum- 

j  * 

stances  of  our  salt  industry  in  this  regard.  Is  it  likely  or  even 
possible  that  a  really  oppressive  monopoly  in  this  article  can 
be  made  ? 

The  salt-producing  territory  of  the  United  States,  while  wide- 
spread, is  nevertheless  so  limited  that  competition  in  manufacture 
is  by  no  means  so  free  as  in  other  lines  where  the  raw  material 
ma}'  be  shipped  in  at  low  rates  ;  e.g.  cotton,  or  shoes.  This 
makes  it  much  easier  for  two  or  three  combinations  to  unite 


20  TRUSTS,    POOLS   AND    CORPORATIONS 

and  control  the  whole  product ;  and  we  have  seen  that  in  two 
instances,  at  least,  for  short  times,  such  a  union  was  made  to 
control  "  disputed  territory  "  —an  expression,  by  the  way,  which 
in  itself  emphasizes  the  limited  nature  of  the  competition. 

The  coal  and  petroleum  industries  have  been  able  to  secure 
complete  control  by  the  aid  of  the  railways.  Aside  from  the 
fact  that  the  capital  invested  in  salt  is  much  smaller,  it  would  be 
much  more  difficult  for  the  associations  to  control  the  means  of 
transportation.  The  territory  is  more  widely  scattered,  and  is, 
besides,  much  of  it  adjacent  to  the  great  lakes.  Such  a  control 
as  the  coal  syndicates  exercise,  would  require  a  controlling  influ- 
ence over  all  the  larger  railways  east  of  the  Mississippi,  and 
over  the  boats  on  lakes  Huron,  Michigan  and  Erie,  as  well. 

A  further  matter  to  be  noted  is  the  large  import  of  salt.  In 
1880  some  38  per  cent  of  all  the  salt  used  in  the  United  States 
came  from  abroad.  Though  part  of  this  is  of  a  different  quality 
and  does  not  enter  into  competition  with  the  American  product, 
yet  a  large  part  of  the  sea-board  traffic  in  salt,  and  the  larger 
part  of  the  salt  used  in  the  South,  is  controlled  by  the  importers. 
The  salt  is  brought  as  ballast,  so  that  the  cost  of  transportation 
to  our  coast  is  practically  nothing.  It  is  the  cost  of  transporta- 
tion from  the  sea-board  that  keeps  it  out  of  the  territory  now 
controlled  by  the  Michigan  association.  It  may  be  readily  seen 
that  our  protective  tariff  on  salt  would  need  to  be  far  higher 
than  at  present,  before  our  manufacturers,  even  if  all  in  the 
United  States  were  united,  could  command  prices  comparable, 
when  considered  with  reference  to  the  cost  of  production,  to 
those  obtained  on  anthracite  coal.  The  character  of  the  com- 
binations, too,  would  need  to  be  much  stricter. 

Without  such  combinations,  considering  the  Michigan  asso- 
ciation as  it  is,  the  New  York  competition  is  enough  to  keep 
the  price  from  becoming  exorbitant.  Add  to  this  the  above- 
mentioned  fact  that  the  association  has  no  power  to  limit  pro- 
duction, and  the  fact  that  new  wells  are  being  sunk  continually, 
whose  owners  can  be  forced  to  join  the  association,  if  inclined 
to  remain  outside,  only  by  a  tedious  and  expensive  fight  on 
prices,  and  the  clangers  to  consumers  from  the  association  seem 
slight.  Doubtless,  the  manufacturers  who  have  been  in  effect 


THE   MICHIGAN    SALT  ASSOCIATION  21 

forced  into  it,  and  who  feel  that  without  an  association  in  the 
state  more  profit  could  be  made,  are  inclined  to  think  that  such 
a  combination. is  oppressive.  These  manufacturers,  however, 
form  but  a  small  proportion  of  those  in  the  state. 

The  conclusion  to  which  one  must  come,  then,  regarding  the 
influence  of  the  association  is  this  :  it  is  probable  that  the  average 
consumer  is  but  slightly  affected,  though  it  is  possible  that  he 
has  to  pay  a  little  more  for  his  salt  than  would  otherwise  be  the 
case;  it  is  certain  that,  with  the  exception  of  a  few  who  are 
uncommonly  well  situated,  the  manufacturers  are  decidedly 
benefited  by  the  association.  Certain  it  is  that  most  of  them 
are  well  content,  and  that  the  association  never  stood  firmer 

than  it  does  to-day. 

J.  W.  JENKS. 

The  subsequent  history  of  combination  in  this  industry  has  been  unfortu- 
nate. The  National  Salt  Company  was  organized  in  New  Jersey  in  1899, 
acquiring  the  business  of  a  company  of  the  same  name  chartered  by  West 
Virginia.  Most  of  its  properties  were  in  New  York,  but  the  company  pur- 
chased the  best  plants  in  Ohio  and  Michigan,  claiming  in  1900  to  include  94 
per  cent  of  the  evaporated  salt  of  the  entire  country  excepting  the  Pacific 
coast.  In  1900  plans  for  controlling  salt  works  in  Spain  and  Italy  were 
inaugurated. 

The  next  step  was  the  formation  of  a  New  Jersey  company  in  1901.  known 
as  the  International  Salt  Company,  which  absorbed  the  National  by  inter- 
change of  securities.  This  operation  was  financially  tainted  by  the  enormous 
compensation,  amounting  to  about  one-third  of  the  stock  of  the  new  company, 
issued  to  the  promoters.  By  1902  also  it  became  clear  that  the  National  Salt 
Company,  which  had  been  paying  dividends  at  8  percent  on  the  common  stock, 
was  practically  insolvent,  not  even  having  earned  interest  on  its  bonds.  It 
was  officially  stated  that  this  embarrassment  was  due  more  to  extravagant 
purchases  of  plants  than  to  losses  in  operation.  Meanwhile  disorganization 
and  losses  of  property  under  receivership  has  greatly  reduced  the  proportion 
of  the  entire  industry  controlled.  In  so  far  as  the  possession  of  natural  salt 
deposits  constitutes  a  basis  tor  monopoly,  a  foundation  for  successful  com- 
bination would  seem  to  be  present:  but  failure  has  evidently  resulted  hitherto 
from  a  combination  of  extravagance,  mismanagement  and  perhaps  even  down- 
right fraud.  —  En. 


II 

THE    DEVELOPMENT   OF   THE   WHISKEY   TRUST1 

IT  is  probably  too  soon  to  tell  with  even  a  reasonable  degree  of 
certainty  what  the  outcome  of  the  present  tendency  towards 
combination  among  producers  is  to  be.  So  far  there  have  been 
not  a  few  egregious  failures,  the  most  noteworthy  being  the 
collapse  of  the  copper  syndicate  —  though  that  was  hardly  a 
trust,  technically  speaking ;  but  there  have  been  also  a  few 
apparently  noteworthy  successes.  It  seems  clear,  at  any  rate, 
that  we  have  still  some  time  to  wait  before  we  can  say  what  the 
resulting  normal  is  to  be ;  and  in  the  meantime  it  seems  best 
not  to  be  too  hasty  in  exterminatory  legislation,  in  sweeping 
denunciation  nor  in  unqualified  praise,  but  to  study  as  accu- 
rately as  is  possible  the  history,  management  and  tendency  of 
the  individual  organizations,  that  when  the  time  for  action  comes 
we  may  act  with  knowledge.  The  present  article  is  an  attempt 
to  describe,  as  accurately  and  fully  as  the  information  that  can 
be  secured  will  permit,  one  of  the  (apparently,  at  least)  most 
successful  of  these  organizations  :  "The  Whiskey  Trust  "  ;  more 
accurately:  "The  Distillers'  and  Cattle-Feeders'  Trust."  The 
significance  and  tendency  of  such  an  organization  as  this  cannot 
be  understood  without  a  knowledge  of  the  circumstances  leading 
to  its  formation.  In  this  case,  interest  is  added  by  the  fact  that 
legislation  by  the  United  States  and  by  some  European  nations 
is,  doubtless,  indirectly  responsible  in  good  part  for  the  condition 
of  business  that  led  to  the  formation  of  the  trust. 

It  is  well  known  that,  from  the  establishment  of  our  govern- 
ment till  the  outbreak  of  the  Civil  war,  distilled  spirits  were  for 
the  most  part  comparatively  free  from  taxation  by  the  United 
States.  The  tax  levied  by  the  recommendation  of  Alexander 

1  Abridged  from  the  Political  Science  Quarterly,  Vol.  IV,  1889,  pp.  296-319. 

22 


THE    DEVELOPMENT   OF   THE   WHISKEY   TRUST      23 

Hamilton,  which  led  to  the  Whiskey  insurrection  in  Western 
Pennsylvania,  was  comparatively  very  light  (only  9  to  n  cents 
per  proof  gallon,  as  compared  with  90  cents  at  present),  and 
even  this  was  repealed  soon  after  the  accession  of  Jefferson 
to  the  presidency.  From  that  time,  with  the  exception  of  four 
years  (from  1813,  when  an  iycrease  of  revenue  was  necessary 
to  carry  on  the  war,  till  1817),  spirits  were  free  until  the  out- 
break of  the  Rebellion.  As  a  consequence,  they  were  sold  at 
a  very  low  price,  —  24  cents  on  the  average  in  New  York  for 
the  five  years  preceding  1862,  with  a  minimum  price  of  14  cents 
per  proof  gallon,  —  and  there  was  little  temptation  to  over- 
production for  either  the  home  or  foreign  market. 

At  the  outbreak  of  the  Rebellion  the  necessity  for  increased 
revenue  that  led  to  the  imposition  of  internal  taxes  wherever 
it  was  thought  that  a  revenue  could  be  raised,  "without  much 
regard  to  acknowledged  politico-economic  laws  or  precedents,"  1 
resulted,  of  course  very  properly,  in  the  taxation  of  distilled 
spirits.  The  first  tax  of  20  cents  a  proof  gallon  (July  I,  1862) 
was  followed,  March  7,  1864,  by  an  act  raising  the  tax  to  60 
cents  per  gallon.  July  i  of  the  same  year  the  rate  went  to 
$1.50;  and  January  i,  1865,  to  $2.00  per  gallon. 

At  each  increase  of  the  tax,  considerable  time  intervened 
before  the  highest  rate  was  imposed.  As  a  natural  conse- 
quence, distilleries  were  run  to  their  utmost  capacity,  and  even 
new  distilleries  were  built  to  get  a  stock  on  hand.-  As  Mr. 
H.  B.  Miller,  the  president  of  the  whiskey  pools,  writes  : 

Some  time  intervened  before  the  various  amounts  were  collected,  and 
during  this  time  the  distiller  and  speculator  had  nearly  the  whole  benefit 
of  the  tax  without  paying  it.  The  speculation  in  whiskey  during  this 
time  was  tremendous.  Editors,  ministers,  statesmen, — -all  took  a  hand. 
Distilleries  were  erected  all  over  the  country,  and  at  the  end  of  the  war 
there  was  three  times  the  capacity  that  could  be  utilized. 


24  TRUSTS,    POOLS   AND    CORPORATIONS 

To  the  same  effect  David  A.  Wells,  in  the  article  on 
"  Distilled  Spirits  "  in  Lalor's  Cyclopedia  of  Political  Science, 
writes : 

The  immediate  effect  of  the  enactment  of  the  first  three  and  succes- 
sive rates  of  excise  was  to  cause  an  almost  entire  suspension  of  the 
business  of  distilling,  which  was  resumed  again  with  great  activity  as 
soon  as  an  advance  in  the  rate  of  tax  in  each  instance  became  probable. 
The  stock  of  whiskey  and  high  wines  accumulated  in  the  country  under 
this  course  of  procedure  was*  without  precedent;  and  Congress,  by  its 
refusal  to  make  the  advance  in  taxation,  in  any  instance,  retroactive, 
virtually  legislated  for  the  benefit  of  distillers  and  speculators  rather  than 
for  the  treasury  and  the  government.  The  profits  realized  by  the  holders 
of  stocks,  thus  made  in  anticipation  of  the  advance  in  taxation,  has 
probably  no  parallel  in  the  history  of  any  similar  speculation  or  commer- 
cial transactions  in  this  country,  and  cannot  be  estimated  at  less  than 
$50,000,000. 

When  the  period  of  speculation  was  over,  the  great  amount  of 
surplus  capacity  for  manufacture  and  the  large  amounts  of  stored 
products  on  hand  made  it,  of  course,  almost  or  quite  impossible 
for  distillers  who  did  not  practise  frauds  on  the  revenue  to  con- 
tinue in  business.  The  high  taxes,  however,  led  to  such  frauds 
that  whiskey  often  sold  in  the  market  for  less  than  the  amount 
of  the  tax. 

Another  factor  that  contributed  to  the  general  depression  was 
the  lessened  demand  for  alcohol  for  use  in  the  arts  and  manu- 
facture. With  alcohol  at  30  or  40  cents  a  gallon,  it  was  used  in 
large  quantities  for  the  manufacture  of  burning  fluid,  varnishes, 
furniture  polish,  perfumeries,  patent  medicines,  even  as  fuel  for 
cooking,  etc. ;  the  United  States  revenue  commission  estimating 
that  in  1860  not  less  than  25,000,000  gallons  of  proof  spirits 
were  so  used.  When  the  tax  was  $1.50  and  $2.00,  or  even  50 
cents,  as  it  was  from  1868  to  1872,  spirits,  of  course,  became 
too  expensive  for  such  purposes.  As  the  tax  has  been  still 
higher  since  that  date  (70  cents  till  1875,  and  90  cents  since 
that  time),  no  increased  demand  for  such  purposes  has  been 
felt. 

These  causes,  including  the  large  amounts  fraudulently  manu- 
factured in  the  earlier  years  of  the  high  taxes,  had  tended  to 


THE    DEVELOPMENT   OF   THE   WHISKEY   TRUST      25 

keep  the  distilling  business  in  a  comparatively  depressed  con- 
dition after  the  speculative  period  following  the  war  had  passed. 
Even  as  early  as  1870  or  1871  the  distillers  felt  themselves  com- 
pelled to  enter  into  an  agreement  to  limit  their  distilleries  to 
two-fifths  production  ;  and  all  north  of  the  Ohio,  with  two  or 
three  exceptions,  made  such  an  agreement.  No  very  decisive 
effect,  however,  was  produced  by  this  arrangement.  The  facili- 
ties for  manufacturing  adapted  themselves  gradually  to  the 
demand  ;  and,  on  account  of  our  cheap  grain,  a  fair  export  trade 
was  growing  up  that  relieved  the  situation  somewhat.  But  in 
the  years  from  1878  to  1882,  on  account  of  successive  crop 
failures  in  Europe,  a  very  heavy  export  demand  at  paying 
prices  sprang  up.  In  1879,  iSSo,  and  1881,  nearly  16,000,000 
gallons  a  year  were  exported.  * 

TAL5LE  I 
SPIRITS  KEMOVKD  IN  BOND  FOR  EXPORT  l 


TAXABLE 

PEXCENTAGE 

TAXABLE 

PERCENTAGE 

YEAR 

(l'KO(ll')  GALLONS 

OF  I'KO- 

YEAR 

1  PROOF)  GALLONS 

OF  FKO- 

IS73      .      .      . 

2,35S>630 

3-45  + 

iSSi    .     .     . 

15,921,482 

13.52  + 

IS74     .      .     . 

4,060,  1  60 

5.90  + 

1882  .    .    . 

8,092,725 

7.64  + 

1875  .  .  . 

5s  7-4  1  3 

0.96  + 

1883  .  .  . 

5,326,427 

7-19  + 

1876    .    .    . 

1,308,900 

2.25  + 

1884  .    .    . 

9,586>73S 

12.70  + 

1877  .  .  . 

2>529'>528 

4-22  + 

1885  .    .    . 

10,671,118 

14.24  + 

1878  .  .  . 

5-499,252 

9.80  + 

1886  .    .    . 

5,646,656 

7.02  + 

1879    .    .    . 

14,837,581 

20.63  + 

1887  .    .    . 

2,223,913 

2.85  + 

1880    .    .    . 

16,765,666 

18.55  + 

i  888   .     .     . 

1,514,205 

2.15  + 

To  meet  this  demand  many  new  distilleries,  including  some  of 
the  largest  in  the  country,  were  built,  while  the  old  ones,  of 
course,  were  run  at  full  capacity.  After  1880,  good  crops  in 
Europe,  poor  crops  at  home,  with  some  changes  in  the  tariff 
laws2  of  leading  European  countries,  especially  discriminating 
duties  against  the  United  States,  cut  off  this  demand,  and  left 

1  Report  of  the  Commissioner  of  Internal  Revenue,  1888. 

-  Rene  Stourm,  L'Imput  sur  I'alcuul  dans  les  principaux  pays,  p.  48. 


26  TRUSTS,  POOLS  AND   CORPORATIONS 

the  distilleries  of  this  country  with  a  capacity  sufficient  to  pro- 
duce four  times  what  the  home  market  needed.1 

Of  course,  there  was,  at  first,  great  over-production,  and  con- 
sequent distress  among  distillers.  They  could  not  export  except 
at  a  loss ;  their  cattle  were  in  the  barns  (the  feeding  of  cattle 
on  the  slop  from  the  distilleries  is  one  important  adjunct  to  the 
distilling  business),  so  that  it  was  difficult  to  close  the  distilleries; 
their  warehouses  were  filled  with  goods,  and  the  market  was 
broken.  Something  must  be  done. 

Some  said  :  Let  this  go  on  and  let  the  fittest  survive.  Our  experience 
was  that  a  distiller  would  keep  on  until  all  his  own  money  and  all  he 
could  borrow  was  gone,  and  when  he  was  used  up  there  was  another 
man  ready  to  step  in  his  shoes.2 

In  November,  1881,  a  general  meeting  was  called  to  form  a 
pool.  Prices  were  really  below  the  cost  of  manufacture  in  many 
places,  and  the  only  remedy  seemed  to  be  to  limit  the  output, 
and  to  export  the  surplus,  even  at  losing  prices.  The  "  Western 
Export  Association "  was  formed,  the  officers  of  which  were 
authorized  to  levy  a  monthly  assessment  on  each  distiller  run- 
ning his  distillery.  This  assessment  was  to  be  proportionate  to 
the  amount  of  grain  used  in  manufacture,  and  high  enough  to 
pay  the  losses  arising  from  the  exportation  of  a  quantity  of  spirits 
sufficient  to  relieve  the  home  market. 

An  appeal  was  made  to  Congress,  asking  that  an  export 
bounty  be  given  equal  to  that  granted  by  Germany  ;  or,  if  a 
bounty  for  export  should  not  be  given  for  fear  of  lessening  the 
revenue,  that  the  internal  revenue  tax  be  raised  to  $1.00  and 
then  a  bounty  of  10  cents  for  export  be  granted.  Congress  and 

1  In  the  references  to  the  trade,  especially  the  exports,  all  the  manufacturers  of 
whiskey  have  so  far  been  considered.  As  the  whiskey  pools  have  mostly  concerned 
only  one  branch  of  the  business,  and  as  the  trust  is  limited  to  this  branch,  i.e.  the 
manufacturers  of  a  product  for  immediate  use,  it  is  worth  while  to  call  attention  to  the 
distinction.  One  class  of  producers,  especially  those  in  Kentucky,  manufacture 
"Kentucky  whiskey,"  technically  so  called,  i.e.  a  product  that  needs  to  be  stored  for 
some  time  (from  two  to  five  or  more  years)  before  it  is  in  good  condition  for  use 
(J.  M.  Atherton :  Testimony  before  Committee  on  Manufacture,  p.  3);  the  other 
class  of  distillers,  located  mostly  north  of  the  Ohio  river,  manufacture  alcohol,  pure 
neutral  or  cologne  spirits,  etc.,  a  product  that  is  fit  for  immediate  use. 

'2  Letter  from  H.  B.  Miller,  former  president  of  the  pool. 


THE   DEVELOPMENT   OF   THE   WHISKEY  TRUST      27 

the  people,  however,  had  not  forgotten  the  whiskey-ring  scandal, 
and  consequently  Congress  did  not  dare  legislate  in  favor  of  dis- 
tillers, even  if  such  legislation  should  injure  no  one. 

This  first  pool  lasted  till  May,  1882;  then,  some  members 
refusing  to  pay  their  assessments,  it  broke  up.  The  distillers 
had  been  able  to  keep  prices  somewhat  higher  by  its  means ; 
but  after  the  breaking  of  the  pool,  they  ran  at  low  profits,  many 
of  them  at  a  loss,  or  else  shut  down  during  the  summer  —  a 
proceeding  which  in  itself  involved  of  course  a  decided  loss. 
In  September,  1882,  they  organized  again  for  one  year  on  a 
similar  plan  ;  but  it  was  found  necessary  to  make  an  attempt 
to  limit  the  output  of  the  distilleries  to  a  small  percentage 
of  their  capacity,  in  addition  to  the  relief  of  the  market  by 
exporting. 

It  soon  became  evident  that  it  was  cheaper  to  limit  production 
by  paying  some  distilleries  to  suspend  production  entirely,  per- 
mitting the  others  to  work  at  more  nearly  their  full  capacity, 
than  to  limit  all  to  a  fixed  percentage  of  their  normal  production. 

Though  the  Kentucky  product  is  of  a  different  kind  from  that 
manufactured  by  members  of  the  pool,  it  of  course  came  into 
competition  with  the  latter  when  it  had  aged  enough  to  be  put 
upon  the  market.  The  law  allowing  distillers  to  keep  their 
product  in  bond  for  three  years  before  paying  the  tax  had  led 
to  a  heavy  overstocking  in  Kentucky,  and  when  this  stored  prod- 
uct first  began  to  come  upon  the  market,  the  situation  became 
still  more  trying. 

From  1883  till  1887  the  pool  continued  for  a  year  at  a  time, 
with  a  suspension  as  often  as  once  each  year.  Sometimes  the 
better  plan  seemed  to  be  to  limit  the  output  of  the  distilleries, 
leaving  each  distiller  to  attend  to  the  marketing  of  the  product 
himself ;  sometimes  for  the  officers  of  the  pool  themselves  to 
provide  for  the  export  of  any  surplus,  assessing  the  individual 
distillers  the  amount  required  to  pay  any  loss  on  the  export.  In 
the  articles  of  organization  of  the  pool  of  1884,  we  read  : 

Only  28  per  cent  of  the  full  capacity  shall  be  operated,  and  no  stock- 
ing up  beyond  this  amount  allowed  under  any  circumstances.  Any 
member  operating  his  house  and  producing  any  kind  of  distilled  spirits 


28  TRUSTS,   POOLS   AND    CORPORATIONS 

must  take  care  of  them  himself.  The  association  is  debarred  from  paying 
any  member  for  maintaining  any  market,  exporting  goods,  or  warehouse- 
ing  them. 

In  spite  of  the  small  percentage  of  capacity  run  during  this 
year,  the  pool  suspended  in  the  spring  of  1885,  though  it  reor- 
ganized again  in  October  of  the  same  year.  At  the  organization 
of  this  pool  (in  1885)  a  committee  reported  : 

It  is  the  sense  of  this  committee  that  no  distillery  shall  be  allowed  to 
run  beyond  40  per  cent.  The  basis  for  market  price  should  be  fixed  at 
the  lowest  possible  figure,  it  being  recognized  by  all  that  high  prices  are 
detrimental  and  difficult  to  maintain. 

Section  12  of  their  articles  of  agreement,  differing  from  those 
of  the  preceding  year,  provides  for  exportation  as  follows : 

To  maintain  prices  at  all  times,  the  officers  shall  cause  to  be  exported 
at  any  time  without  the  United  States  any  surplus  that  may  at  any  time 
appear,  allowing  and  paying  therefor  [such]  a  bonus  as  will  equal  the 
quotation  prices,  and  [shall]  report  all  such  exports,  the  quantity  shipped, 
the  bonus  paid,  etc. 

Section  13  further  provided  that  the  president  should  cause  a 
suspension  of  the  association  for  the  following  causes : 

If  a  distiller  runs  more  than  he  is  entitled  to  run ;  if  a  distiller  refuses 
to  exhibit  his  government  book  to  an  authorized  agent  :  if  a  distiller 
refuses  or  neglects  to  make  his  monthly  report  or  refuses  to  accept  his 
draft  or  pay  his  monthly  assessments  ;  if  a  distiller  resumes  his  capacity 
and  operates  his  distillery  having  once  sold  it  ;  in  case  exported  goods 
are  re-imported  and  placed  upon  the  domestic  market  ;  in  case  closed 
houses  are  not  paid  in  full,  and  in  one  payment,  for  each  month,  before 
the  close  of  said  month. 

A  resolution  was  also  passed  providing  that  the  association  be 
suspended  when  any  new  distillery  should  be  built  and  start  to 
run.  Provisions  were  also  made  for  the  examination  of  the 
government  books  of  each  distiller  by  the  officers  of  the  pool, 
in  order  to  prevent  deception  and  cutting  of  rates  on  the  part 
of  any  distiller ;  but  in  spite  of  these  precautions,  and  in  spite 
of  the  high  prices  they  were  able  to  maintain  for  their  goods  in 
the  pool,  it  was  found  that  the  temptations  to  secure  sales  by 


THE   DEVELOPMENT   OF   THE   WHISKEY  TRUST      29 

the  cutting  of  prices  were  so  great  that  members  would  violate 
the  terms  of  the  agreement.  Within  two  months  after  its  for- 
mation, in  calling  a  meeting  of  the  distillers  whose  houses  were 
running,  in  order  to  determine  the  amount  of  assessments, 
prices  of  goods,  etc.,  the  president  of  the  pool  expresses  clearly 
the  state  of  the  trade.  It  should  be  remembered,  in  consid- 
ering his  words,  that  they  were  written  not  to  influence  legisla- 
tion or  public  opinion,  but  that  they  were  addressed  to  men 
directly  concerned,  who  knew  the  circumstances.  Among  other 
things,  he  says  with  reference  to  over-production  and  the  proper 
policy  of  the  pool : 

That  we  shall  over-produce  after  the  holidays  we  all  know  —  we  knew 
it  when  we  organ! /eel  in  Chicago  and  for  that  very  reason  made  the 
assessment  12  cents  on  40  per  cent  to  create  an  export  fund.1  That 
we  have  already  over-produced,  figures  will  show.  ...  A  few  more 
days  running  without  a  pool  would  have  wound  you  up,  and  this  over- 
production we  are  not  trying  to  get  rid  of  by  exportation.  You  want  to 
look  these  figures  square  in  the  face ;  and  if  it  takes  more  money  to  do 
our  exporting  than  you  thought,  it  is  occasioned  by  your  own  folly  in 
over-producing  so  heavily  in  September  and  October.  As  long  as  we 
have  funds  to  export  the  surplus  there  will  be  no  difficulty  in  maintain- 
ing prices.  \Yhen  goods  accumulate  without  any  outlet,  then  is  the 
time  when  cutting  commences.  ...  It  will  not  do  to  make  the  price 
of  goods  too  high,  for  as  we  raise  the  price  we  must  raise  the  bonus  on 
exports  correspondingly.  .  .  .  There  are  but  two  things  left  for  us  to 
do  ;  either  provide  sufficient  means  to  keep  our  warehouses  clear  of  the 
surplus  by  exportation,  or  let  the  market  go  to  pieces  of  its  own  weight. 
I  am  well  convinced  there  is  cutting  going  on  secretlv  now,  and  unless 

O      o  O  . 

provision  is  made  at  once  to  arrest  it,  it  will  be  done  openly,  until  there 
is  nothing  left  of  the  market.  Situated  as  we  are,  the  question  is  no 
longer  as  to  making  a  great  amount  of  money,  but  to  prevent  our  suffer- 
ing great  losses.  This  is  the  problem  for  you  to  solve,  and  the  meeting 
is  called  thus  early  as  an  imperative  necessity,  and  all  running  houses 
should  be  present.  Distillers,  when  they  have  an  accumulation  of  goods 
on  hand,  will  not  hesitate  to  cut  prices  on<:  cent  a  gallon  to  make  a  sale, 
when  they  will  hesitate  to  pay  one-half  cent  a  gallon  to  make  cutting 
//////<•< Y-KIV/T,  even  if  double  the  amount  is  placed  in  their  hands.  Right 


TRUSTS,   POOLS  AND    CORPORATIONS 


here  I  will  repeat  what  I  have  so  often  stated  before,  that  the  amount 
of  the  assessment  does  not  come  out  of  the  distiller,  but  out  of  the  con- 
sumer, the  same  as  the  government  tax,  and  he  [the  distiller]  is  merely 
the  agent  to  collect  and  pay  it  over,  of  course  with  the  qualification  that 
prices  are  maintained. 

He  closes  a  series  of  statistics  (regarding  the  output  in  com- 
peting states)  with  the  words  : 

I  have  been  particular  in  giving  you  all  the  information  possible,  so 
you  can  act  intelligently  at  the  next  meeting.  The  only  way  to  main- 
tain prices  is  to  get  rid  of  the  surplus  by  exportation.  You  can  fly  in 
the  face  of  Providence  if  you  see  fit,  but  it  will  bring  its  own  punishment 
with  it. 

TABLE  II 

POOL  ASSESSMENTS,  SEPTEMBER,  1884,  TO  APRIL,  1887,  INCLUSIVE 


1884 

Cents  per  bushel 
mashed 

1885 

Cents  per  bushel 
mashed 

1886                       1887 

Cents  per  bushel    Cents  per  gallon 
mashed 

January    

8 

16 

3 

February  .           .... 

8 

Q 

7 

March   '  

8 

s 

10 

J 

4 

April    

8 

IO 

4 

(Extra      assess- 

ment for  i  day: 

35  cents.) 

May     

_ 

IO 

June     

/ 
9 

8 

fulv      

o 

A 

August      

J 
0 

•T 

6 

September  '  

6 

,/ 

f  per  bush.  2 
I  per  gal.     2 

October    .                                          6 

npr  irn  1          ? 

November     ,                                          12                         "3 

December      

8                                !•>                              "              7 

J 

|  (Also  extra  as- 

sessment   for    i 

day:    $i  50   per 

bushel.) 

1  Assessment  for  September,  1886,  was  2  cents  per  gallon  produced  (equal  to  9 
cents  per  bushel),  and  also  an  assessment  of  2  cents  per  bushel  ;  making  a  total  of 
ii  cents  per  bushel.  By  multiplying  the  assessment  per  gallon  by  4*,  the  amount  per 
bushel  will  be  obtained  nearly.  About  4}  gallons  of  spirits  are  made  per  bushel  corn. 


THE    DEVELOPMENT   OF   THE   WHISKEY   TRUST       31 

A  pool  seemed  a  necessity ;  but  the  experience  of  this  and 
of  the  following  year  seemed  to  show  that  a  pool  could  not  be 
maintained.  The  competition,  there  can  be  no  doubt,  was  for 
many  ruinous,  though  those  best  situated  could  live  and  make 
profits.  The  difficulty  in  maintaining  the  pool,  together  with 
the  effect  of  the  pool  on  prices,  may  be  seen  in  the  fluctuating 
figures  of  Table  III  (page  37).  The  same  movements  are 
illustrated  graphically  in  the  Diagram  (pages  42,  43),  and 
there  the  changes  may  be  more  readily  noted.  Table  II  shows 
the  extent  of  the  assessments  from  September,  1884,  to  the 
time  of  the  formation  of  the  trust.  It  has  not  been  possible  to 
obtain  the  earlier  assessments. 

In  consequence  of  the  competition,  and  in  order  that  a  closer 
organization  might  be  established,  it  was  determined  by  the 
leading  distillers,  in  the  spring  of  1887,  to  organize  a  trust, 
formed  upon  the  model  of  the  Standard  Oil  Trust.  The  "  trust 
agreement,"  published  in  the  examination  of  the  president  of 
the  trust  before  the  congressional  committee  in  1888,  provides 
that  the  trust  created  shall  be  vested  in  nine  trustees ;  that 
these  trustees,  under  bonds  of  $100,000  each,  shall,  in  accord- 
ance with  section  1 1  : 

.  .  .  exercise  supervision,  so  far  as  their  ownership  of  stocks  enables  them 
to  do,  over  the  several  corporations  or  associations  whose  stock  is  held 
by  said  trustees.  As  stockholders  of  said  corporations  they  shall  elect 
or  endeavor  to  elect  honest  and  competent  men  as  directors  and  officers 
thereof,  who  shall  be  paid  a  reasonable  compensation  for  their  services. 
They  may  elect  themselves  as  such  directors  and  officers,  and  shall 
endeavor  to  secure  such  judicious  and  efficient  management  of  such 
corporations  as  shall  be  most  conducive  to  the  interests  of  the  holders 
of  trust  certificates. 

No  distillery  was  to  be  allowed  to  join  this  trust  except  the 
members  of  the  former  pool ;  but  any  member  of  the  former 
pool,  if  a  corporation,  might  join  upon  the  assignment  of  a 
majority  of  stock  by  the  individual  stockholders  to  these  trus- 
tees. For  the  stock  thus  assigned,  the  trustees  prepared  stock 
certificates,  which  showed  the  interests  of  each  beneficiary  in 
said  trust.  The  certificates  were  divided  into  shares  of  the  par 


32  TRUSTS,   POOLS  AND   CORPORATIONS 

value  of  $100  each,  and  were  known  as  the  "Distillers'  and 
Cattle-feeders'  Trust  certificates."  Any  distillery  not  owned  by 
a  corporation  might  be  re-organized  in  corporate  form  in  order, 
by  the  aforesaid  assignment  of  stock,  to  join  the  trust.  In  accord- 
ance with  section  4  of  the  trust  agreement,  no  certificates  could 
be  issued  except  for  stock,  and  the  par  value  of  the  certificates 
issued  were  to  represent  as  nearly  as  possible  the  actual  cash 
value  of  the  stock  held  by  the  trustees  in  trust.  In  estimating 
the  value  of  the  plants  owned  by  the  different  corporations,  the 
following  elements  were  considered  :  (i)  the  cost  of  the  construc- 
tion of  the  plant ;  (2)  the  amount  of  working  capital  required  for 
its  management,  and  (3)  its  earning  power.  This  last  element, 
of  course,  depends  upon  various  factors,  and  of  necessity  was 
left  largely  to  the  judgment  of  the  committee  appointed.  The 
location  of  the  distillery,  the  skill  of  its  former  managers,  their 
ability  to  secure  a  sale  for  their  product,  and  other  factors  would 
all  need  to  be  considered.  Furthermore,  the  earning  capacity  of 
the  distillery  under  the  management  of  the  trustees,  if  it  should 
be  allowed  to  run,  might  vary  quite  materially  from  its  former 
earning  power.  These  different  considerations  led  the  committee 
to  issue  certificates  for  from  two  to  three  times  the  cash  value  of 
the  plants.  This  has  led  some  of  the  critics  to  state  that  the 
trust  certificates  were  about  two-thirds  water.  A  careful  con- 
sideration of  the  factors  involved  will  enable  the  reader  to  judge 
how  far  this  is  true.1  That  jealousy  among  the  different  corpo- 
rations might  be  avoided,  the  value  placed  upon  the  stock  of 
each  corporation  was  not  made  known  except  to  the  corporation 
immediately  interested  and  to  the  trustees. 

The  trust  was  to  continue  for  twenty-five  years  from  the  date 
of  its  organization,  and  thereafter  until  terminated  by  a  vote  of 
sixty-six  and  two-thirds  per  cent  in  value  of  the  holders  of  cer- 
tificates, at  a  meeting  called  for  that  purpose. 

At  the  first  annual  election  three  trustees  were  to  be  elected 
to  hold  their  office  for  one  year;  three  to  hold  their  office  for 
two  years,  and  three  for  three  years.  Thereafter  three  trustees 
were  to  be  elected  annually  to  take  the  place  of  those  retiring, 
each  to  hold  his  office  for  three  years,  except  in  case  of  those 

1  Sec  Testimony  of  J.  B.  Greenhut  before  Committee  of  Manufactures,  pp.  73  et  set}. 


THE   DEVELOPMENT   OF   THE   WHISKEY  TRUST      33 

elected  to  fill  a  vacancy,  who  should  hold  until  the  expiration  of 
the  term.  A  person  to  hold  the  office  of  trustee  must  be  the 
actual  owner  of  at  least  500  shares  of  trust  certificates. 

The  meetings  of  the  certificate  holders  take  place  annually, 
and  may  be  called  oftener  at  the  request  of  thirty-three  and 
one-third  per  cent  of  value  of  the  trust  certificates. 

It  is  to  be  noted  that  this  trust  agreement  expressly  provides 
that  the  trustees  are  not  limited  in  their  duties,  as  has  been  often 
suggested,  to  the  receipt  of  dividends  or  interests  upon  the 
stocks  or  moneys  held  in  trust,  and  to  the  division  of  such  divi- 
dends to  the  holders  of  trust  certificates  ;  but  they  are  also  to 
elect  competent  men  as  directors  and  officers  of  said  corpora- 
tions represented,  and  are  to  exercise  supervision  over  the 
several  corporations  whose  stock  is  held  by  them  as  trustees. 
Furthermore,  it  is  to  be  noted  that  these  trustees  in  every  case 
hold  a  majority  of  the  stock  in  each  corporation,  so  that  their 
control  over  each  distillery  is  absolute.  A  manager  is  appointed 
by  the  trustees  for  each  distillery,  whose  salary  is  paid  out  of 
the  trust  funds.  This  manager  is,  of  course,  usually  one  of  the 
leading  original  stockholders  and  managers  in  that  distillery. 

In  order  that  the  business  may  be  kept  well  in  hand,  reports 
are  required  daily  from  each  distillery  engaged  in  manufacture; 
and  each  distillery  that  is  running  sends  in  a  detailed  report 
every  month,  showing  the  exact  cost  of  manufacture  of  the 
product  and  all  other  details  regarding  the  management  of  the 
business.  Again,  by  these  monthly  reports  the  trustees  are 
able,  if  they  wish  to  lessen  or  to  increase  the  amount  produced, 
to  close  the  distilleries  that  are  working  least  successfully  or  to 
open  those  that  furnish  the  best  opportunity  to  supply  any 
special  market.  The  trustees  are  also  at  liberty  to  purchase 
distilleries  that  are  running  outside  of  the  trust,  and  to  lease 
distilleries  managed  by  the  trust,  whenever  in  their  opinion  this 
plan  seems  more  profitable  than  to  operate  them  by  trust  officers. 
In  the  latter  case,  of  course,  the  profits  are  still  held  under  the 
control  of  the  trust. 

This  firm  control  over  the  different  distilleries  enables  the 
trustees  to  control  the  market  by  limiting  the  output  of  thu 
product  to  the  amount  demanded  rather  than  by  exporting 


34  TRUSTS,   POOLS   AND   CORPORATIONS 

the  surplus  at  a  loss,  as  was  done  under  the  old  pools.  Almost 
no  attempt  has  been  made  by  the  trust  to  gain  control  of  the 
foreign  market,  and  none  of  the  product  has  been  exported  at  a 
loss  since  the  formation  of  the  trust.  Their  comparatively  small 
exports  (see  Table  I,  page  25)  have  been  at  paying  prices. 
A  brief  examination  of  Table  II  (page  30),  which  gives  the 
monthly  assessments  levied  upon  the  members  of  the  old  pool 
(from  6  cents  to  18  cents  per  bushel)  from  September,  1884,  to 
the  formation  of  the  trust  in  May,  1887,  will  show  how  great  a 
saving  has  thus  been  effected. 

Another  saving  is  that  which  comes  from  the  lessened  expenses 
of  management,  resulting  from  the  closing  of  so  many  distilleries. 
Nearly  all  the  distilleries  in  the  former  pool,  to  the  number  of 
more  than  eighty,  have  become  members  of  the  trust.  In  order 
to  limit  the  output  to  the  demands  of  the  market,  these  distilleries, 
if  running  when  they  joined,  have  been  from  time  to  time 
closed,  until  at  the  present  time  twelve  distilleries  supply  the 
total  amount  that  is  placed  by  the  trust  upon  the  market.  One 
or  two  others  are  running,  but  for  the  production  of  yeast,  or 
some  other  product  than  spirits.  It  is  by  no  means  to  be 
assumed  that  the  decrease  in  the  output  corresponds  in  any 
manner  with  the  number  of  distilleries  closed.  When  it  is 
taken  into  consideration  that  for  several  years  the  output  of  the 
distilleries  had  been  often  limited  to  from  25  to  50  per  cent  of 
their  capacity,  many  of  them  even  closing  for  portions  of  the 
year,  it  will  be  seen  that  an  equal  output  might  be  produced  by 
a  much  less  number  of  distilleries.  That  there  has  been  a 
smaller  aggregate  output  is  doubtless  true,  and  that  to  an  extent 
more  than  enough  to  balance  the  lessened  amount  exported. 
The  amount  is  held  in  hand  well  enough,  so  that  the  trust  can 
manage  to  control  the  market. 

An  examination  of  Table  III  (page  37),  which  gives  the  market 
prices  of  corn  and  whiskey  from  the  time  of  the  formation  of  the 
first  pool,  in  1881,  to  March,  1889,  will  show  that  the  price  of 
alcohol  has  not  been  to  any  noticeable  extent  raised  by  this  clos- 
ing of  the  distilleries.  For  some  six  or  eight  months  after  the 
formation  of  the  trust  the  prices  were  lowered  eight  or  nine  cents 
per  gallon,  although  the  prices  of  corn  ruled  somewhat  higher 


THE   DEVELOPMENT   OF   THE   WHISKEY   TRUST      35 

than  before.  Presumably  the  purpose  of  this  lowering  of  the 
prices  at  first  was  to  bring  pressure  to  bear  upon  the  distilleries 
yet  remaining  outside  of  the  trust  in  order  to  force  them  to  join 
the  trust,  or  else  because  in  the  beginning  the  trust  did  not  yet 
have  strength  to  force  the  market.  After  all  or  nearly  all  of  the 
members  of  the  former  pool  had  joined  the  trust,  so  that  its 
membership  was  practically  complete,  and  it  became  evident 
that  a  contest  with  the  distillers  yet  remaining  outside  was  at 
hand,  the  managers  of  the  trust  raised  the  price.  The  new 
members  would  need  dividends  to  keep  them  contented,  and 
there  was  also  a  necessity  of  accumulating  a  fund  upon  which 
to  enter  upon  this  contest  with  their  rivals. 

A  comparison  of  the  prices  of  corn  and  alcohol  for  the  year 
preceding  the  formation  of  the  trust  with  the  prices  from  May, 

1888,  to  January,  1889  (see  Table  III,  or  Diagram),  will  show 
that  the  profits  made  by  the  trust  have  not  been  greater  than 
those  made  by  the  old  pool,  unless  the  cost  of  management  of 
the  distilleries  has  been  much  decreased  ;  and  yet,  during  this 
period  from  May,  1888,  to  January,  1889,  the  trust  had  put  the 
price   high   enough   to   enable  them   to   pay  good   dividends   to 
members  that  might  otherwise  have  become  dissatisfied  and  to 
accumulate  a  surplus  for  the  purpose  of  a  contest  with  outsiders. 
It  is  from  this  very  evident  that  the  saving  in  cost  of  manage- 
ment and  manufacture   has  been  very  great.      It  must  also  be 
kept  in  mind  that  from  twelve  to  twenty  distilleries  have  been 
earning  these  dividends  on  stock  that  represents  some  eighty- 
three  distilleries.     This  emphasizes  still  more  the  great  saving 
effected  in  expenses. 

The  immediate  result  of  this  increase  in  price  (from  $1.05  to 
81.09  per  gallon,  and  then  to  $1.14)  was  the  building  of  new 
distilleries,  notably  the  large  distillery  at  St.  Paul;  the  opening 
of  many  small  distilleries,  and  the  manufacture  of  spirits  by  the 
smaller  distilleries  in  Kentucky,  whose  normal  product  was 
whiskey  for  aging.  When  at  length  it  became  evident  that  the 
distilleries  outside  of  the  trust  were  also  making  a  large  product 
and  the  output  from  these  distilleries  was  beginning  to  have  its 
effect  upon  the  market,  the  trustees,  on  the  ist  day  of  January, 

1889,  again  cut  the  price  of  the  product  to  $1.04  per  gallon,  in 


36  TRUSTS,   POOLS  AND   CORPORATIONS 

order  to  crush  their  opponents.  The  smaller  distilleries  in  Ken- 
tucky and  elsewhere  of  course  closed  promptly,  or  changed  the 
character  of  their  product.  The  most  formidable  rivals  of  the 
trust,  Shufeldt  &  Co.  of  Chicago,  who  had  doubtless  also  made 
large  gains  from  the  increase  in  price  and  who  had  run  their 
distillery  at  even  more  than  its  normal  capacity,  at  once  cut  down 
their  output,  though  they  have  not  closed  and  are  even  building 
a  new  house  of  3000  bushels  capacity. 

What  the  next  move  will  be,  remains  to  be  seen.  It  is  said 
by  the  managers  of  the  trust  that  their  best  policy  is  to  hold  the 
price  of  the  product  below  the  cost  of  manufacture  by  most  of 
the  rival  distilleries  and  thus  keep  the  market  steady.  They 
claim  that  they  are  able  to  do  this  from  the  saving  in  manage- 
ment and  from  the  fact  that  they  run  only  the  distilleries  most 
favorably  located.  For  local  trade  they  can  run  those  that  will 
save  freight ;  and,  in  fact,  they  run  one  in  Cincinnati,  one  in  St. 
Louis,  one  in  Kansas  City,  etc.  The  figures  of  the  trust,  gath- 
ered from  the  various  distilleries  under  their  control,  show  that 
the  distilleries  at  Peoria  have  an  advantage  of  from  14  to  15  per 
cent  over  most  of  the  distilleries  located  elsewhere,  so  that  here 
some  six  are  running.  It  is  the  belief  of  distillers  not  members 
of  the  trust,  as  well  as  of  the  trustees,  that  a  Peoria  distillery 
has  at  least  10  per  cent  advantage  over  a  distillery  located  at 
Chicago,  and  nearly  20  per  cent  over  one  located  at  St.  Paul. 
This  claim  seems  to  be  substantiated  by  the  statement  of 
Charles  Clark,  for  many  years  past  a  prominent  distiller  at 
Peoria,  though  not  now  in  the  business  himself.  He  says  that 
at  times  of  great  depression  in  the  business,  during  the  exist- 
ence of  the  former  pools  and  earlier,  his  distillery  made  regu- 
larly 10  per  cent  on  the  running  capital  and  25  per  cent  on  the 
plant,  besides  good  salaries  for  the  managing  members  of  the 
firm.  \Yith  the  exception  of  one  year  this  rate  of  profit  was 
made  for  many  years  prior  to  the  formation  of  the  trust,  and  in 
that  unfortunate  year  there  was  a  clear  profit  of  Si 2,000.  Dur- 
ing this  very  time  the  complaints  of  distillers  in  other  parts  of 
the  country  that  money  was  being  lost  and  that  no  interest 
could  be  made  on  their  investments  were  doubtless  often  true. 
On  the  other  hand,  in  estimating  the  ability  of  the  trust  to  com- 


THE   DEVELOPMENT   OF   THE   WHISKEY   TRUST      37 

TABLE   III 

MARKKT  PRICES  AT  PEORIA  FOR  WHISKEY  AND  CORN  FROM  iSSi  TO  1888  INCLUSIVE 


1881 

1882 

1883 

1884 

MONTH 

Whiskey 

Corn 

Whiskey  ! 

Corn 

Whiskey 

Com 

Whiskey 

Corn 

January    .     .     . 

1.15-1.16 

62  59 

1.13-1.14 

441-50.1 

1.15-1.16 

4  i  1-47 

February  .     .     . 

1.16-1.17 

585  54 

1.14-1.15 

48-551 

1.16-1.17 

47-42 

March.     .     .     . 

I.IO 

58}-66 

1.15 

564  49 

1.17 

41.5-48 

April     .... 

1.17 

664-  75 

1.15 

475-525 

1.17-1.12 

43-5-505 

May      .... 

1.13-1.17 

75-70: 

1.15 

50-53 

I.  12 

48-54.1 

June     .... 

1.11-1.15 

72  69 

1.15 

53-475 

1.  08 

July      .... 

1.11-1.14 

73   75 

1.15 

48-45 

I.08-I.07 

44-49 

August 

1.14-1.16 

74-1-77 

1.15 

45-51 

1.05 

47l-5ol 

September 

1.16-1.18 

75-59 

1.15 

,      , 
495-4° 

I.IO-I.II 

51-45 

October     .     .     . 

1.16  1.18 

61-70. 

1.15 

45-474 

I.  II 

40-53 

November 

1.11-1.15 

625  58 

1.14  1.15 

7°!  67 

1.15 

46.1-49 

I.II-I.I2 

42-30 

December 

1.15 

58-1-02 

1.13-1.15 

55-1  45 

i  15 

52-45 

1.  12 

30-1-35 

Mi\-~ri  i 

1885                     1880 

1SS7 

1888 

18SS 

ONTH 

Whis- 
key 

r             Whis- 
Corn          key 

Coi 

Whis-       r 
n          key          Corn 

Whis- 
key 

r         \\Vl 
Corn       k 

-Corn 

January    . 

1.12-1.14 

i      0          l  IQ 

-,-,- 

5         i-H       33  -35-1        1-09 

4Si-47          !• 

34       30 

February  . 

1.14 

584-36.5        1.10 

34-324        1-14       35  -33:i        i-°9 

47-45-1     i- 

34    :   29.1 

March."   .     .     . 

1.14 

!  74-40.5         1.10 

33" 

4',        1.14       33  -38          1.09 

45.1-49       '-°4       30 

April     .... 

1.14 

59j~47il       I-"3 

33*- 

2.V       1.14       37  -36          1.09 

47-1-534 

May      .... 

1.14 

50-45    ;       i.io 

33-291:1.14-1.05    3  -38.5  1.09-1.13 

52i-57.1 

June      .     .     .      .   !      1.14 

44-47.5-  '       i.io 

29-. 

i     1.05-1.00  38  -36     1.13-1.14 

534-46J 

July      ....          1.14 

47-43'i   1.10-1.07  -^1-- 

i.V     1.05      3s  -34',,     1.14 

49-432 

August      .     .     .         1.14 

51-42';   1.09-1.11 

40.1-39          1.05        38-42',         1-14       451-4° 

September     .     .          i. 

3.5-40.',   1.  11-1.13 

38i-30               1.05            41     -3y\             I.I4 

44-40^ 

October     .     .     .     1.04-1.09  42.5—38!  1.13-1.14 

35!- 

21        1-05        39   -41,         1.14 

394-44 

November     .      .          1.09       44-5-32          1.14 

i      I 

f:\                  1.05                  3')       -46                        I.I4 

425-38 

December      .     .     1.09-1.10335-315!      1.14 

33;-33i.       I-°5       44  -49-1        J-J4       33i-->92 
I                                   ,                   1 

AVERAGE  YIELD  PER  BUSHEL l 


V  F.I.I) 


YEAR  YIELD 


1883 
1884 


YEAR 


YII;  ,D 


4.070 
4-53 


YKAK  \"IH  . 


4.62 
4-53^ 


38  TRUSTS,    POOLS   AND    CORPORATIONS 

pete  with  its  rivals,  it  must  be  remembered  that  fourteen  dis- 
tilleries must  make  profit  enough  to  pay  dividends  on  the  capital 
invested  in  more  than  eighty  distilleries,  a  drawback  amply  suf- 
ficient to  offset  any  slight  benefit  in  the  cost  of  manufacture. 
A  distiller  who  has  no  closed  houses  to  carry,  no  dividends  to 
pay  on  capital  that  is  inactive,  has  certainly  something  of  an 
advantage.  If  the  trust  holds  its  own  firmly,  however,  this 
advantage  will  soon  to  a  great  extent  disappear,  as  the  trust  will 
doubtless,  as  opportunity  offers,  dispose  of  the  useless  closed 
distilleries  and  turn  the  dead  capital  into  profitable  channels. 

The  trust  has,  doubtless,  had  some  benefit  from  the  fact  that 
dealers  would  fear  to  incur  the  hostility  of  so  powerful  an  organ- 
ization by  purchasing  from  its  rivals.  This  is  again  offset  in 
part,  by  the  popularity  of  certain  brands  of  whiskey  (though 
this  would  apply  especially  to  the  Kentucky  product)  the  manu- 
facturer of  which  can  always  be  sure  of  his  market.  It  is  prob- 
able, at  any  rate,  that  the  advantage  is  not  so  decidedly  with 
the  trust  that  it  can  totally  crush  out  all  competition,  though 
this  can  be  determined  more  certainly  after  a  year  or  two.  At 
present  it  manufactures  only  from  80  to  85  per  cent  of  the  total 
product  in  the  market,  and  its  rivals  are  preparing  to  compete 
still  more  vigorously.  Shufeldt  &  Co.  of  Chicago,  as  has  been 
said,  are  building  a  new  distillery,  and  there  are  reports  that 
others  in  Illinois  are  soon  to  be  built.  The  trust  cannot  afford 
to  buy  out  all  distilleries  that  may  be  built.  If  it  is  to  succeed, 
it  must  keep  its  prices  so  low  that  new  distilleries  will  not  be 
built.  Its  action  in  pushing  up  the  price  last  year,  if  a  merely 
temporary  expedient  to  accumulate  a  fund,  was  perhaps  a  wise 
move  from  the  standpoint  of  the  trust ;  but  such  prices,  quoted 
too  often,  would  not  be  of  advantage.  The  trust  must  succeed 
by  underselling  its  rivals,  not  by  buying  them  out.  This  is 
evidently,  too,  the  policy  of  the  organization ;  for  it  is  a  rule 
that  no  distilling  company  not  in  the  old  pool  can  join  the 
trust.  Even  those  companies  have  not  been  coaxed  in  by  too 
large  offers,  as  is  sometimes  asserted.  The  assertion  made  in 
the  New  York  Evening  Post  of  January  2,  1889,  by  the  agent 
of  Shufeldt  &  Co.,  that  the  trust  had  tried  in  many  ways  to 
force  that  firm  into  union,  and  had  even  offered  it  $1,000,000  in 


THE   DEVELOPMENT   OF   THE   WHISKEY  TRUST      39 

cash  to  join  the  organization  is,  even  if  correctly  reported,  not 
true.  Both  the  trust  officers  and  Shufeklt  &  Co.  deny  it. 
Doubtless  the  trust  would  be  glad  to  be  joined  by  so  important 
a  rival ;  and  it  is  conceded  by  members  of  the  trust  that,  had 
the  company  joined  them  when  the  trust  was  organized,  its 
managers  could  have  had  much  influence  in  the  new  organiza- 
tion. The  implication  is  that  they  might  have  had  a  trustee. 
It  is  worth  while  to  give  this  much  of  the  case,  because  it  shows 
the  position  the  trust  has  taken  regarding  perhaps  its  most 
formidable  rival,  and  the  course  it  must  pursue  if  it  is  to  suc- 
ceed. It  must  meet  its  competitors  in  fair  business  rivalry 
and  be  able  to  control  by  low  prices  the  larger  part  of  the 
sales. 

As  much  is  said  regarding  the  influence  of  trusts  and  combi- 
nations of  all  kinds  on  wages  and  prices  of  materials,  it  may  be 
worth  while  to  mention  the  statements  on  this  subject  furnished 
by  the  president  of  the  trust  to  the  congressional  committee. 
The  coopers  that  manufacture  barrels  for  the  distilleries  and 
the  miners  that  furnish  coal  both  testify  that  the  distilleries  con- 
nected with  the  trust  voluntarily  raised  the  prices  for  barrels 
and  coal  so  that  fair  wages  could  be  paid.  Before  the  organi- 
zation of  the  trust  such  a  rise  in  prices  could  not  be  given  on 
account  of  the  fierce  competition,  and  even  after  its  formation 
distilleries  not  connected  with  the  trust  held  the  miners  to  their 
former  oppressively  low  contracts,  instead  of  following  the  ex- 
ample of  the  trust.  The  president  of  the  trust  adds  that  while 
they  "do  not  wish  to  take  the  position  as  posing  before  the  pub- 
lic as  benefactors  to  any  extent,"  yet  they  do  believe  in  "the 
principle  of  intelligent  cooperation,"  and  as  they  can  afford  to 
pay  good  wages  they  are  willing  in  justice  and  fairness  so  to  do. 

Most  of  the  advocates  of  trusts  and  pools  claim  that  one  of 
the  chief  advantages  to  come  from  them  is  stability  of  prices. 
An  examination  of  Table  III,  or  better,  of  the  Diagram,  will 
show  that  while  the  fluctuations  are  somewhat  less  frequent 
under  such  a  regime,  yet,  when  a  fall  or  rise  in  price  does  come, 
it  is  sudden,  and  is  apt  to  be  a  change  of  considerable  extent. 
It  is  very  questionable  if  there  is  any  gain  from  such  a  policy. 
The  lack  of  stability  under  the  old  pool  was  due,  it  was  claimed, 


40  TRUSTS,   POOLS  AND   CORPORATIONS 

to  the  instability  of  the  pool  itself  ;  but  so  far  matters  have 
been  little  better  in  this  respect  under  the  trust.  One  thing 
seems  better  under  the  trust :  the  trust  itself  has  stability,  and 
seems  to  have  power ;  it  may  steady  prices  if  it  will  put  them 
somewhat  low  and  be  satisfied  with  moderate  steady  returns, 
instead  of  striving  for  great  gains  interspersed  with  very  small 
ones.  The  future  will  determine  what  is  to  be  its  policy.  The 
managers  of  the  trust  say  that  the  policy  of  the  trust  is  to  secure 
steady,  moderate  gains ;  others  who  are  interested  question  this. 
The  system  of  high  gains  alternating  with  low  ones,  if  pursued 
as  a  regular  policy,  would  do  much  to  justify  the  distrust  of  the 
public  and  would  take  away  the  only  ground  on  which  such 
combinations  can  fairly  be  justified :  low,  steady  prices. 

A  sufficiently  accurate  estimate  of  the  real  benefits  accruing 
to  the  various  distilleries  from  their  association  in  the  trust  may 
be  obtained  from  an  examination  of  the  dividends  paid  by  the 
trust  since  its  formation,  and  from  the  value  of  the  trust  certifi- 
cates. Although  the  trust  was  organized  in  June,  1887,  many 
of  the  distillers  belonging  to  the  old  pool  had  not  been  received 
into  the  trust  until  about  the  beginning  of  the  following  year ; 
so  that  any  dividends  paid  before  January,  1888,  cannot  be  con- 
sidered fair  tests  of  the  management  or  of  the  success  of  the 
trust.  From  January,  1888,  to  July,  1888,  inclusive,  a  dividend 
of  one-half  of  one  per  cent  per  month  was  paid ;  for  August 
the  dividend  decreased  to  one-fourth  of  one  per  cent ;  and  from 
September  till  January,  1889,  inclusive,  dividends  of  one-third 
of  one  per  cent  per  month  were  declared.  The  dividend  for 
February,  1889,  again  decreased  to  one-fourth  of  one  per  cent, 
owing  doubtless  to  the  late  cut  in  price.  It  must  be  borne  in 
mind,  also,  that  in  addition  to  the  dividends  throughout  the  year 
1888,  a  surplus  was  being  accumulated  to  carry  on  the  contest 
with  outside  distillers.  It  was  said  by  some  members  of  the 
trust,  when  the  trust  certificates  were  valued  at  30,  that  they 
then  represented  about  the  actual  cash  value  of  the  plant.  If 
this  be  accepted. as  an  accurate  estimate,  and  it  is  doubtless  not 
far  from  the  truth,  we  can  readily  see  that  the  trust  has  paid 
dividends,  during  somewhat  more  than  one  year  of  active  exist- 
ence, of  more  than  12  per  cent  per  annum. 


March 

i. 

5°- 

1888.     Aug. 

28. 

43- 

14. 

48. 

Sept. 

7- 

40. 

April 

i. 

45^- 

19. 

39j. 

20. 

42j. 

Oct. 

10. 

36J- 

May 

1  1  . 

45*. 

20. 

35*- 

June 

4- 

43- 

Nov. 

13- 

39- 

1  8. 

40. 

21. 

39- 

July 

2. 

41. 

Dec. 

12. 

35- 

7- 

44. 

21. 

33- 

24- 

45- 

1889.     Jan. 

4- 

33- 

Aug. 

13- 

42. 

THE   DEVELOPMENT   OF   THE   WHISKEY   TRUST      41 

TABLE   IV 

QUOTATIONS  OF  MARKET  VALUE  OF  DISTILLERS'  AND  CATTLE-FEEDERS' 
TRUST  CERTIFICATES 

1889.     Jan.       15.     30. 

3i-     31- 
Feb.        9.     32. 

18.     33- 
March    4.     34. 

7-     35- 
13.    36}. 

20.      35.}. 

April      I.     34. 
6.     34. 

An  examination  of  Table  IV,  which  gives  the  value  of  trust 
certificates  for  each  month  from  March,  1888,  to  the  present 
time,  will  lead  us  to  about  the  same  conclusion.  As  soon  as  it 
became  evident  that  the  trust  was  firmly  established  and  bade 
fair  to  be  a  success,  some  small  sales  of  certificates  were  made 
to  enthusiastic  buyers  as  high  as  65  ;  others  among  distillers  at 
55  ;  but  no  real  market  for  trust  certificates  was  established 
above  50.  With  some  slight  variations  the  value  has  slowly 
decreased,  until  in  January,  1889,  the  lowest  value  (30)  was 
reached,  since  which  time  a  slight  increase  in  value  is  to  be 
noted.  The  figures  in  this  table  are  based  upon  actual  sales, 
and  there  can  be  no  doubt  as  to  their  accuracy.  It  is,  however, 
to  be  remarked  that  the  certificates  are  held  mainly  by  the  large 
distillers  as  investments  (though  the  number  of  individual  cer- 
tificate holders  has  largely  increased),  and  that  comparatively 
few  transfers  of  trust  certificates  have  been  made.  The  prices 
quoted  of  course  depend,  too,  to  some  extent,  upon  the  amount 
invested  at  the  time.  The  certificates  are  not  listed  in  any  stock 
exchange,  and  there  cannot  be  said  to  be  any  regular  market 
for  them,  though  they  can  be  obtained  through  brokers  in  four 
of  the  principal  cities :  Peoria,  Chicago,  Cincinnati  and  New 
York.  The  figures  given  represent,  then,  almost  with  perfect 
accuracy,  the  value  placed  by  the  distillers  and  the  liquor  dealers 
upon  the  certificates. 

The  facts  given  with  reference  to  the  working  of  the  trust 

o  o 


TRUSTS,    POOLS   AND    CORPORATIONS 


seem  to  show  that  it  has  been  beneficial  to  the  greater  portion 
of  the  manufacturers  of  alcohol  and  spirits  in  the  United  States, 
although  individual  distillers  have  perhaps  made  no  more,  and 
some,  it  may  be,  have  made  even  less  profit  than  they  could 
have  made  acting  independently ;  while,  so  far  at  least,  the 
prices  to  consumers  have  not  been  on  the  whole  increased,  and 
the  tendency  seems  to  be  towards  lower  and  steadier  prices  for 
the  future.  As  has  been  said,  however,  only  the  future  can 


'81 


1882. 


DIAGRAM  ILLUSTRATING  THE  HISTORY 
1883.  1884.  1885. 


$i.i5 


The  (dotted)  line  A  shows  the  average  market  value  of  corn  per  bushel  at  Feoria. 
The  line  B  shows  the  average  market  value  of  the  whiskey  (the  spirits  used  for  base- 
in  prices)  from  one  bushel  of  corn.  To  obtain  this  value,  the  revenue  tax  was  de- 
ducted from  the  market  value  of  one  gallon,  and  the' difference  multiplied  by  the 
average  yield  per  bushel  of  corn.  —  The  space  between  the  lines  A  and  B  represents, 
of  course,  the  cost  of  production  plus  the  profits.  During  the  greater  part  of  the 
pool's  existence,  assessments  for  export  expenses  must  be  deducted  from  the  profits. 
{See  Table  II.) 


THE    DEVELOPMENT   OF   THE    WHISKEY   TRUST      43 

determine  what  the  policy  of  the  trust  is  to  be.  The  facts  seem 
to  show  that  it  is  within  the  power  of  the  trust  to  bring  about 
this  result ;  and  it  seems  to  be  for  its  interest  so  to  do.  As 
regards  the  stronger  rivals  of  the  trust,  the  prices  have  so  far 
been  so  high  that  they  have  not  suffered  materially.  The  next 
year  or  two  will  show  whether  they  can  endure  the  competition. 
Even  if  they  should  be  forced  to  close,  the  question  is  still  an 
open  one  whether  more  distilleries  would  have  not  been  closed 


OF  THE  WHISKEY  POOLS  AND  TRUST.* 
1885.  1886.  1887. 


1888. 


'Professor  Jenks.  in  his  7'nnt  Problem.  N.V..  1902.  p.  146.  continues  this 
price  diagram  to  1900.  Much  other  information  is  in  the  Reports  United 
States  Industrial  Commission,  Vol.  I.  1900.  —  Ei>. 


44  TRUSTS,   POOLS  AND   CORPORATIONS 

under  free  competition.  Many  stockholders  are  now  drawing 
dividends  from  the  trust  who,  without  the  trust,  would  doubtless 
have  lost  much  of  their  capital. 

At  the  time  of  the  formation  of  the  trust,  it  was  thought  by 
some  of  the  distillers  living  at  Peoria  that,  on  account  of  their 
unusual  facilities  for  manufacture,  the  trust  should  be  limited  to 
Peoria  distilleries  and  a  few  others  favorably  located.  The  ex- 
perience of  the  trust  seems  to  show  that,  had  this  plan  been 
followed,  the  trust  might  have  paid  higher  dividends  to  its  mem- 
bers and  might  also  have  held  the  price  of  alcohol  so  low  that 
outside  competition  would  not  have  been  much  more  successful 
than  it  has  been  under  the  present  arrangement.  Some  distillers 
who  believed  in  this  latter  plan  —  presumably  for  the  most  part 
Peoria  manufacturers  —  still  think  it  would  have  been  better  to 
have  limited  the  organization  to  five  years  with  the  option  then 
to  continue,  suspend,  or  reorganize.  They  feel  that  the  owners 
of  the  less  favorably  situated  distilleries  have  an  undue  advan- 
tage. Of  course,  this  depends  mainly  upon  the  relative  value 
placed  upon  the  plants  when  they  entered  ;  but  it  is  probable 
that  it  would  have  been  cheaper  to  crush  some  of  the  weaker 
members  than  to  buy  them  by  admitting  them  to  draw  dividends. 
Against  this  view  is,  of  course,  the  fact  that  such  action  would 
have  aroused  bitter  hostility  that  might  well  have  resulted  in  the 
building  of  new  distilleries  in  locations  where  they  would  have 
become  formidable  rivals. 

On  the  whole,  while  there  is  this  slight  tendency  to  think 
that  matters  might  have  been  better  under  some  other  form  of 
organization,  or  even,  for  a  few,  with  no  organization  ;  and  while 
there  may  be  a  slight  feeling  that  the  trustees  are  not  entirely 
free  from  nepotism  in  their  appointments,  any  more  than  are  our 
highly  esteemed  executive  officers  of  the  United  States ;  yet,  as 
was  shown  a  year  ago  by  the  unanimous  reelection  of  all  the 
trustees  at  a  meeting  in  which  ninety-nine  and  one-half  per  cent 
of  all  the  certified  holders  were  represented,  as  well  as  by  the 
general  expression  of  satisfaction  on  the  part  of  the  distillers 
one  meets,  the  trustees  are  thought  to  have  performed  their 
responsible  duties  with  descretion,  and  the  trust  is  considered 
by  its  members  a  success.  T  W.  JEXKS. 


THE    DEVELOPMENT   OF   THE   WHISKEY   TRUST      45 

The  later  history  of  this  combination  has  been  checkered.  In  1890, 
it  was  reorganized  as  a  corporation,  as  the  Distilling  and  Cattle  Feeding 
Co.  Its  ownership  of  distilleries  was  extended  to  practically  all  important 
competitors.  In  1893,  failure  impending  because  of  the  accumulation 
of  floating  debts  for  unpaid  rebates,  bonds  were  issued.  For  two  years 
various  scandals,  mainly  speculative,  developed  under  its  control  by 
receivers;  and  the  Supreme  Court  of  Illinois  in  1896  ousted  it  from  its 
franchises  (156  111.  448).  Meanwhile  in  1895  it  had  been  again  reor- 
ganized as  the  American  Spirits  Manufacturing  Co.,  incorporated  in  New 
York.  This  company  took  over  all  the  best  distilleries  in  the  field.  Other 
plants  and  branches  of  the  business  were  independently  incorporated 
under  the  laws  of  New  Jersey  during  the  next  four  years  in  three  principal 
companies.  These  were  again  united  to  the  main  stem  in  1899,  as  The 
Distilling  Co.  of  America,  capitalized  at  $125,000,000.  Over  ninety  per 
cent  of  the  securities  of  this  company^in  1902  were  in  turn  acquired  by 
a  holding  or  finance  company,  the  Distillers'  Security  Corporation  of  New 
Jersey,  which  has  issued  about  $50,000,000  of  capital  stock.  —  EL>. 


Ill 

THE   WIRE-NAIL   ASSOCIATION    OF    1895-96! 

SO  lately  as  1888  The  American  Architect  began  an  article 
on  nails  in  this  way  :  "  The  nails  commonly  used  in  con- 
nection with  building  operations  are  too  well  known  to  require 
any  description.  They  are  specifically  designated  as  plate 
nails."2  That  year,  1888,  was  almost  the  first  in  which  plate 
or  cut  nails  felt  a  real  competition  from  wire  nails.  In  that 
year  the  latter  formed  less  than  a  fifth  of  the  total  product ; 3 
in  1895  they  constituted  nearly  three-fourths.  The  idea  of 
making  nails  of  wire  did  not  arise  in  America ;  in  fact,  our 
people  were  even  somewhat  slow  to  adopt  it.  The  first  wire 
nails  —  headed  by  hand  and  ground  to  a  point  —  appear  to  have 
been  made  in  France  early  in  this  century.4  Mr.  M.  Baackes, 
an  old  wire-nail  manufacturer  of  Cleveland,  says  that  the  first 
machine  for  forming  the  heads  was  made  in  France  about  i85O.5 
According  to  Mr.  John  Hassall,  who  is  still  engaged  in  making 
wire-nail  machinery  in  New  York  city,  his  father  was  active  in 
making  and  running  the  first  wire-nail  machines  used  in  this 
country,  early  in  the  fifties.6  The  business  seems  to  have 
extended  itself  only  modestly,  for  Mr.  Baackes  regards  the 
factory  which  he  helped  to  start  at  Covington,  Ky.,  in  1875,  as 
"  the  first  mill  for  the  manufacture  of  wire  nails  on  this  side 
of  the  Atlantic.""  The  production  rose  from  20,000  kegs  in 
1880,  according  to  Mr.  Baackes's  estimate,  to  125,000  in  1887; 
and  the  average  price  fell  from  820.00  per  keg  in  18/5  and 

1  From  the  Political  Science  Quarterly,  Vol.  XII,  1897,  pp.  246-272. 
'-'  American  Architect,  Aug.   iS,  iSSS,  p.  73. 

3  Report  of  American  Iron  an<l  Steel  Ass  'iciati  in,  1889,  p.  45. 

4  M.  Piaackcs,  in  In>»  .-/Vv,  [an.  2,  1896.  p.  106. 
•'  //'///.  '•  Iron  Age,  April  23,  iS<>(\  p.  997. 
7  M.  liaackes,  in  Iron  Age,  Jan.  2,  1896,  p.  106. 

40 


THE    WIRE-NAIL   ASSOCIATION    OF    1895-96  47 

$10.00  in  1880  to  $4.81  in  1887.  At  the  end  of  1887  a  manu- 
facturer wrote  :  "  Wire  nails  are  now  quoted  at  less  than  actual 
cost,  as  results  will  in  time  demonstrate."  x  About  the  same 
time  the  Iron  Age,  the  leading  paper  of  the  hardware  trade, 
said  editorially  :  "  It  is  evident  that  the  business  is  now  greatly 
overdone."2  The  production  increased,  however,  to  more  than 
300,000  kegs  in  1890,  and  to  nearly  600,000  kegs  in  1895  ;  and 
the  average  price  fell  to  $2.85  in  1890,  according  to  the  esti- 
mate of  Mr.  Baackes,  and  to  Si. 60  in  1894.  At  present,  April  i, 
1897,  it  is  about  $1.50.  These  facts  show  how  recently  and 
how  rapidly  the  business  has  attained  importance,  and  how 
fast  the  price  of  wire  nails  has  fallen. 

The  profits  of  the  early  wire-nail  men,  as  first  comers  in  the 
field,  were  doubtless  good  ;  but  the  cost  of  production  at  that 
time  must  not  be  gauged  by  the  later  selling  prices.  At  the 
outset  their  machinery  was  imperfect.  Then,  the  first  nails 
were  of  small  sizes,  for  special  purposes,  such  as  use  in  cigar 
boxes,  furniture,  mouldings,  and  wagons  ;  and  small  nails  are 
relatively  costly.  It  was  not  till  1886  that  a  list  of  regular  or 
"penny"  nails  was  published,  and  a  serious  effort  was  made 
to  compete  with  cut  nails  in  the  general  market.  The  wire  of 
the  first  makers,  too,  was  all  of  Norway  iron  ;  for  they  could  not 
get  any  other  material  on  which  they  could  form  a  head  that 
would  not  break  off  in  driving.  The  H.  P.  Nail  Co.,  established 
in  1879,  is  said  to  have  been  the  first  to  succeed  in  using  Bes- 
semer steel  wire.  Finally,  the  price  of  Bessemer  steel  itself 
was  at  first  much  higher  than  now.  Although  quotations  on 
steel  billets  earlier  than  1887  are  not  available,  their  fall  in  price 
may  be  gauged  by  that  of  steel  rails,  which  dropped  from  an 
average  of  848.25  per  ton  in  1879  and  867.50  in  1880  to  837.08 
in  1887.  Billets  were  832.55  on  the  average  in  1887  and  816.58 
in  i894,3  while  they  are  now  quoted  at  about  815.00.  It  was 
the  removal  of  these  early  limitations  that  made  possible  the 
great  expansion  of  the  industry. 

As  the  business  is  now  carried  on,  regular  nails  are  sold  with 
reference  to  a  "base  price"  and  a  uniform  schedule,  or  "card," 


48  TRUSTS,   POOLS  AND   CORPORATIONS 

of  "extras."  Excepting  under  the  card  made  in  1895,  the  base 
has  always  been  the  same  as  the  price  of  the  largest  nails.  It 
is  the  base  only  that  is  named  in  market  reports  and  in  quota- 
tions. The  extras,  which  are  added  to  the  base  to  determine 
the  prices  of  the  smaller  sizes,  are  fixed  by  agreement  of  the 
manufacturers,  and  are  likely  to  remain  unchanged  for  several 
years  together.  From  April  n,  1892,  to  July  19,  1895,  the 
card  was  as  follows  : 

6o-d.  base  (no  extra) 

5O-d.  $.10  extra 

3O-d.  and  4O-d.                       .25 

20-  d.  .35 

12-d.  "     i6-d.                       .45 

lo-d.  .50 

8-d.  "       9-d.                       .60 

6-d.  «       7-d.                       .75 

4-d.  "       5-d.                        .90 

3-d.  1.20 

2-d.  1. 60 

When  6o-d.  nails  were  quoted  at  $.85,  put  up  in  a  keg  which 
I  am  assured  by  a  manufacturer  cost  at  least  $.09,  the  wire  from 
which  they  were  made  was  quoted  at  $1.15.  Every  nail-maker 
who  bought  his  wire  in  the  market  lost  the  whole  cost  of  hand- 
ling and  manufacture,  and  nearly  four-tenths  of  a  cent  besides, 
on  every  pound  of  6o-d.  nails  he  sold.  The  explanation  of  his 
apparent  willingness  to  sell  below  cost  is  found  in  the  char- 
acter of  the  list  of  extras,  and  in  the  manner  in  which  all  orders 
were  required  to  be  assorted.  The  extras  on  all  the  smaller 
nails  were  far  greater  than  the  differences  in  cost  between  them 
and  the  largest.  Indeed,  the  wire  for  a  keg  of  12-d.  nails  cost 
no  more  than  that  for  a  keg  of  6o-d.  No  manufacturer  would 
sell  6o-d.  alone  at  the  market  price.  All  orders  had  to  be  so 
assorted  that  the  average  of  the  extras  on  the  whole  should  be 
at  least  $.60  per  keg  :  that  is,  if  a  dealer  gave  an  order  for  a 
hundred  kegs,  at  a  base  price  of  $.85,  he  had  to  make  it  up  in 
such  a  way  that  the  average  price  of  the  whole,  by  the  schedule, 
would  be  not  less  than  $1.45.  So  the  loss  on  the  larger  and 
cheaper  sizes  was  covered  by  the  gain  on  the  smaller  and  dearer. 
Some  small  manufacturers  took  advantage  of  this  artificial  ad- 


THE    WIRE-NAIL   ASSOCIATION    OF    1895-96  49 

justment  of  prices,  by  making  only  the  smaller  sizes,  and  leaving 
the  losing  end  of  the  schedule  to  the  great  establishments. 

I.    HISTORY  OF  THE  ASSOCIATION 

Iron  and  steel  products  have  been  particularly  fruitful  of  com- 
binations ;  but  before  1895  circumstances  had  not  been  favor- 
able to  bringing  wire  nails  into  the  list.  The  manufacturers  had 
been  fairly  contented,  making  the  comfortable  profits  of  a  new 
and  rapidly  growing  business.  It  is  probable  that  combinations 
are  not  easily  formed  in  any  industry  so  long  as  the  average 
man  of  those  concerned,  with  average  advantages,  can  make  such 
a  profit  as  the  general  opinion  of  business  men  pronounces  fair ; 
and  that  consolidation  generally  results  from  a  strong  sense 
of  pressure.  In  this  business,  by  the  beginning  of  1895,  the 
necessary  pressure  had  developed.  The  manufacturers  cried 
out  with  one  voice  that  they  \vere  ruined  by  competition.  It 
must  be  noted,  however,  that  most  men  do  not  consider  it  good 
policy,  under  any  circumstances,  to  magnify  their  profits  before 
the  world  ;  that  men  who  have  been  accustomed  to  large  profits 
do  really  imagine  themselves  ruined  when  they  are  reduced  to 
not  much  more  than  ordinary  interest  on  their  capital ;  and  that 
lugubrious  statements,  made  in  general  terms  and  without  fig- 
ures, ought  not  to  be  taken  without  salt.  The  bulk  of  the  wire- 
nail  business  was  in  the  hands  of  six  or  eight  great  companies, 
which  had  their  own  wire  mills  and  rod  mills,  and  put  the  material 
through  all  the  processes  from  the  form  of  the  steel  billet.  So 
long  as  smaller  concerns,  buying  their  wire  in  the  market,  con- 
tinued to  do  business,  it  strains  credulity  somewhat  to  believe 
that  the  great  establishments  did  not  make  moderate  profits. 
The  curious  arrangement  of  the  schedule  of  extras  does  seem  to 
have  given  a  certain  opportunity  to  small  makers  ;  but  the  matter 
was  in  the  hands  of  the  great  companies,  and  they  would  have 
changed  the  schedule  if  they  had  found  it  to  work  strongly 
against  them.  The  strict  requirement  of  assorted  orders  made 
it  impossible  for  any  maker  of  small  nails  only  to  do  more  than  a 
very  restricted  business.  If  any  dealer  bought  many  nails  of  such 
a  maker,  he  could  not  buy  his  large  nails  at  the  market  price. 


50  TRUSTS,   POOLS   AND   CORPORATIONS 

The  days  of  good  profit  to  the  average  man  with  average 
advantages  were,  however,  gone  by;  and  the  manufacturers  — 
large  and  small  alike  —  were  in  a  state  of  mind  to  yield  them- 
selves plastic  to  the  hand  that  could  organize  the  machinery  for 
increasing  profits.  This  hand  belonged  to  Mr.  John  H.  Parks 
of  Boston,  who  had  been  a  member  of  the  old  firm  of  Loring  & 
Parks,  long  well  known  as  manufacturers  of  tacks.  That  firm 
combined  with  their  principal  competitors,  some  six  years  ago, 
in  forming  the  Atlas  Tack  Corporation,  which  is  still  the  giant 
of  the  tack  trade ;  though  the  leading  men  connected  with  it 
have  thought  it  well  during  the  last  few  months  to  put  it 
through  a  receivership  and  a  reorganization,  with  the  usual 
absorption  of  the  interests  of  the  smaller  investors.  For  sev- 
eral years  past,  Mr.  Parks  has  confined  his  personal  attention 
to  the  promotion  of  combinations  in  various  lines  of  hardware. 
Bolts  and  shovels,  as  well  as  tacks  and  nails,  have  known  his 
supple  hand.  From  a  time  early  in  the  spring  of  1895,  he 
seems  to  have  been  busy  in  working  up  an  agreement  among 
the  manufacturers  of  nails.  The  approaching  consummation 
of  this  enterprise  was  announced  on  May  2,  through  the  Iron 
Age,  in  the  following  words  : 

With  a  view  to  securing  a  better  condition  of  things  and  correcting 
influences  which  hitherto  have  tended  toward  irregularity  in  prices  and 
the  unsettling  of  the  market,  the  manufacturers  have  been  conferring 
with  a  view  to  concerted  action  in  this  direction. 

The  combination  began  its  activity  with  the  customary  decla- 
ration as  to  its  moderate  purposes  with  respect  to  price.  In 
the  article  from  which  I  have  quoted,  this  vital  matter  is  thus 
dealt  with  :  "  The  manufacturers  directly  concerned  in  the  move- 
ment disclaim  any  intention  of  advancing  prices  unreasonably, 
their  purpose  being  to  market  their  goods  at  a  reasonable 
profit." 

The  first  effect  of  the  rise  of  the  combination  was  a  press  of 
orders.  Many  jobbers  bought  all  the  nails  that  they  expected 
to  need  for  six  months  or  more.  From  about  May  I  the  manu- 
facturers refused  to  accept  any  orders  for  shipment  later  than 
May  30.  By  May  15  the  base  price  had  risen  to  $.95  ;  and  by 


THE   WIRE-NAIL   ASSOCIATION    OF    1895-96  51 

the  2Oth  it  had  become  so  difficult  to  place  large  orders  that 
there  was  no  quotable  price.  Some  sales  were,  however, 
reported  about  this  time  at  $1.15  to  $1.20.  The  combination 
was  formally  completed  in  the  last  week  of  May,  and  the  base 
price  for  June  was  fixed  at  $1.20,  for  car  lots,  f.  o.  b.  Pittsburg. 
All  nails,  no  matter  from  what  mill,  were  to  be  sold,  freight 
paid,  on  the  basis  of  the  Pittsburg  price,  plus  the  rate  of  freight 
from  Pittsburg  to  the  point  of  destination.  For  instance,  a  cus- 
tomer at  Anderson,  Ind.,  would  have  to  pay  a  base  price,  consist- 
ing of  $1.20  plus  the  rate  of  freight  from  Pittsburg  to  Anderson, 
whether  he  bought  in  Pittsburg,  or  in  Cleveland,  or  from  the  mill 
in  his  own  town.  Jobbers  were  allowed  a  discount  of  five  cents 
per  keg  on  purchases  of  a  thousand  kegs  from  one  mill  within 
one  calendar  month  ;  and  the  minimum  was  soon  reduced  to  five 
hundred  kegs.  In  addition,  a  rebate  of  ten  cents  per  keg,  pay- 
able after  six  months,  was  offered  to  jobbers  who  should  neither 
buy  any  nails  from  outside  makers  nor  sell  below  the  associa- 
tion price. 

The  form  of  the  association  was  that  of  a  simple  pool.  Prices 
and  output  were  always  fixed  for  a  month  in  advance.  The 
agreed  production  was  apportioned  to  the  companies  on  a  basis 
depending  partly  on  sales  for  three  months  before  the  pool  was 
formed,  partly  on  production  in  one  of  those  three  months,  and 
partly  on  capacity  as  indicated  by  the  number  of  machines. 
Any  mill  could  sell  its  privilege  of  production,  or  any  part  of  it; 
but  every  mill  was  rigidly  restricted  to  its  allotment  during  each 
calendar  month,  unless  it  bought  the  allotment  of  another.  A 
cost  price  was  assumed,  which  was  supposed  to  represent  the 
cost  of  production  at  Pittsburg ;  and  the  cost  at  every  other 
point  was  assumed  to  be  equivalent  to  the  Pittsburg  cost  with 
freight  from  Pittsburg  added.  This  was  because  the  raw  mate- 
rial comes  chiefly  from  the  Pittsburg  region.  So  the  selling 
price,  including  delivery  at  the  buyer's  railroad  station,  and  the 
assumed  cost  price  were  harmonized  by  the  use  of  the  Pittsburg 
base.  All  the  profits,  above  the  cost  prices  so  arrived  at,  were 
paid  into  the  pool;  and  the  amount  in  the  pool,  after  paying  all 
expenses,  was  divided  monthly.  The  basis  of  division  was  the 
same  as  the  basis  for  the  allotment  of  production. 


52  TRUSTS,   POOLS  AND   CORPORATIONS 

An  inspector,  hired  by  the  association,  was  placed  at  each 
association  mill,  with  the  most  sweeping  powers  of  investigation. 
Every  part  of  the  mill,  every  book,  every  letter  written  or  re- 
ceived, was  open  to  him.  So  far  as  possible,  outside  owners 
of  nail  machines  were  hired  to  keep  them  idle,  and  makers  of 
machines  were  hired  to  refuse  orders  for  them  from  persons 
outside  the  association.  For  a  year  it  was  very  difficult  to  buy 
a  machine,  and  while  the  association  lasted  it  was  never  easy. 
A  company  which  went  into  the  business  in  the  autumn  of  1896 
writes : 

We  found  the  market  in  which  we  could  buy  machines  was  very 
limited,  most  of  the  machine  manufacturers  having  entered  into  an 
arrangement  with  the  combination  to  stop  making  them  for  outside 
parties.  We  were  unable  to  obtain  what  we  wanted,  and  consequently 
our  production  of  nails  was  much  below  what  we  intended  it  to  be  when 
we  started. 

With  a  similar  combination  of  Canadian  nail  manufacturers, 
the  association  made  an  agreement  by  which  each  bound  itself 
not  to  offer  goods  in  the  territory  of  the  other.  Efforts  were 
also  made  to  induce  the  European  manufacturers  to  agree  to 
let  none  of  their  nails  come  to  America.  Although  it  is  said 
that  they  did  not  meet  with  much  success,  only  one  large  lot  of 
nails  and  a  few  small  lots  were  actually  imported  during  the 
existence  of  the  pool. 

The  agreement  of  the  wire-nail  men  was  accompanied  by  a 
similar  agreement  of  the  cut-nail  men.  Although  separate  in 
form,  these  two  organizations  acted  as  one.  The  price  of  cut 
nails  was  accordingly  advanced  with  that  of  wire  nails,  at  first 
20  cents  below,  and  afterwards  uniformly  25  cents  below  —  a 
difference  not  relatively  greater  than  that  which  had  existed 
before  the  pool  was  formed.  Wire  nails  were  so  far  preferred 
that,  in  spite  of  the  difference  in  price,  their  competition  had 
reduced  the  trade  in  cut  nails  to  a  fraction  of  its  former  size, 
and  had  thrown  hundreds  of  cut-nail  machines  out  of  use.  The 
existence  of  these  machines  was  one  of  the  chief  sources  of 
embarrassment  to  the  two  associations.  The  wire-nail  pool  had 
to  turn  over  large  sums  to  its  weaker  associate,  to  be  used  in 


THE   WIRE-NAIL  ASSOCIATION    OF    1895-96  53 

paying  the  owners  of  these  old  cut-nail  machines  to  keep  them 
idle. 

The  demand  for  nails  continued  very  strong  through  June. 
The  production  for  the  month  had  been  restricted  somewhat,  in 
order  to  insure  control  of  the  market.  Before  the  I2th  the 
mills  had  sold  their  entire  allotments  for  the  month  and  were 
refusing  all  orders.1  Yet,  at  their  meeting  held  the  week  fol- 
lowing, they  made  a  further  restriction  of  their  output  for  July, 
reducing  it  to  about  half  the  average  monthly  product  for  the 
previous  year,2  and  fixing  the  price  for  July  at  $1.55.  Dealers 
anticipated  a  further  advance,  and  in  their  desire  to  protect 
themselves  clamored  for  nails.  Before  July  4  some  manufac- 
turers had  sold  their  entire  allotment  for  the  month  and  were 
again  refusing  orders.  By  the  loth,  few  nails  could  be  bought 
from  manufacturers.3  On  July  18  a  new  "card, "or  schedule 
of  extras,  was  adopted.  The  extras  on  lo-d.  and  smaller  nails 
were  not  changed  ;  but  all  larger  sizes  were  put  on  an  equality 
with  io-d.,  with  an  extra  of  50  cents.  The  requirement  of 
assorted  orders,  or  a  minimum  average  of  extras,  was  abolished  ; 
but  the  lowest  extra  was  now  almost  up  to  the  old  required  aver- 
age. The  base  price  for  August  was  made  $2.05. 

The  success  of  the  nail  combination  had  been  followed  by  a 
sharp  and  general  advance  in  the  prices  of  iron  and  steel  prod- 
ucts, and  had  doubtless  contributed  to  cause  it.  A  market 
report  of  May  30  said:  "Billets  are  $17.50  and  will  likely  be 
higher,  and  the  agreement  reached  by  the  wire-nail  mills  is  also 
having  its  effect  on  rods,  and  prices  are  very  much  higher."4 
Between  May  i  and  August  r  plain  wire,  from  which  nails  are 
made,  rose  from  a  base  price  of  $1.10  per  cwt.  to  $1.50;  wire 
rods,  from  which  wire  is  drawn,  from  821.00  per  gross  ton  to 
$29.00;  steel  billets,  from  which  rods  are  rolled,  from  815.50 
per  gross  ton  to  821.50.  There  seems  to  have  been  what  is 
called  a  good  understanding  between  the  producers  in  these 
lines,  but  no  formal  combination.  On  August  22,  however, 
this  announcement  appeared  :  "  The  barb-wire  trade  has  been 
organized  on  the  same  lines  as  the  wire-nail  trade.  A  sharp 

1  fr.ni  . /;v,  Time  I J,  lSc)5-  [>.  1248.  3  //'/./. 

'-  //'/,/.,  July  u,  1895.  T-  ^5-  4  ti'i^-i  ^a,v  3°.  1895,  p.  1143. 


54  TRUSTS,   POOLS   AND    CORPORATIONS 

advance  in  prices  has  been  made.  Plain  wire  will  likely  advance 
in  sympathy  with  barb  wire."1  On  September  5  it  was  an- 
nounced that  prices  of  plain  wire  had  been  advanced,  "  as  the 
result  of  an  understanding  arrived  at  by  the  manufacturers." 
The  base  price  of  wire  nails  was  advanced  to  $2.25  on  Septem- 
ber i,  "  in  view  of  the  increased  cost  of  raw  material."  The 
demand  had  continued  good  during  August.  In  the  latter  part 
of  the  month,  in  consequence  of  the  restriction  of  output,  there 
had  been  some  scarcity.  In  September  the  demand  began  to 
fall  off  notably,  but  the  mills  disposed  of  their  allotments  for 
the  month.  Trade  was  poor  in  October,  and  in  November  it 
was  very  light.  The  manufacturers  complained  particularly  of 
the  large  stocks  which  the  jobbers  had  on  hand,  and  which  some 
of  them  were  offering  rather  under  the  combination  price.  The 
pool  was  strengthened  in  November,  however,  by  the  accession 
of  several  companies  which  had  been  operating  outside. 

About  November  25  the  only  large  lot  of  nails  which  has 
been  imported  into  this  country  in  many  years  was  received  by 
the  Bigelow  &  Dowse  Co.,  of  Boston.  Rumor  puts  the  amount 
at  about  5000  kegs,  or  20  carloads.  Several  small  lots  were 
received  at  New  York  during  the  next  year,  but  the  largest  is 
not  believed  to  have  exceeded  500  kegs.  It  is  not  known  by 
what  means  the  Bigelow  &  Dowse  Co.  were  convinced  that  it 
would  be  better  not  to  repeat  their  operation  ;  but  apparently 
they  did  not  cut  the  association  price,  and  they  brought  in  no 
more  nails.  Jobbers,  who  investigated  the  matter  with  a  view 
to  importing,  say  that  English  nails  could  not  at  any  time  have 
been  imported  with  profit,  but  that  German  and  Belgian  nails 
could  have  been  laid  down  in  Boston  or  New  York  at  from  50 
to  70  cents  below  the  highest  price  reached  by  the  pool,  even 
after  paying  the  duty  of  25  per  cent.  It  required  more  cour- 
age than  appears  at  first  sight,  however,  to  venture  on  placing 
foreign  orders.  The  German  and  Belgian  nails  are  shipped  in 
bags,  and  to  make  them  salable  in  the  American  market  they 
must  be  kegged  after  receipt,  at  an  expense  of  from  10  to  20 
cents  a  keg.  The  head  is  formed  a  little  differently  from  that 
of  the  American  nail,  and  the  tendency  of  human  nature  to 


THE   WIRE-NAIL   ASSOCIATION    OF    1895-96  55 

reject  the  unaccustomed  might  cause  some  objection  to  it.  But 
the  chief  deterrent  of  imports,  aside  from  the  tariff,  was  the 
power  of  the  pool  to  drop  the  price  at  any  time  to  a  point  that 
would  cause  the  importer  a  very  serious  loss.  Nothing  would 
have  been  so  likely  to  cause  a  drop  as  the  fact  that  large  for- 
eign orders  were  being  placed. 

The  duty  on  nails  does  not  now  serve  any  purpose  except  to 
increase  the  power  of  combinations.  Nails  are  produced  here 
as  cheaply  as  anywhere  in  the  world,  and  are  regularly  exported. 
The  duty  does  not  protect  the  industry,  and  under  full  compe- 
tition does  not  affect  the  price.  But  if  there  had  been  no  duty 
when  the  pool  was  organized,  either  it  would  not  have  been 
organized,  or  it  would  have  had  to  content  itself  with  a  much 
more  moderate  advance.  An  excessive  advance  would  have 
caused  the  other  obstacles  to  importation  to  be  overcome,  and 
would  have  led  to  free  purchases  abroad. 

In  December  the  manufacturers  gave  jobbers  a  guaranty  on 
their  December  purchases  against  decline  in  January  :  that  is, 
they  agreed  that,  if  they  made  a  reduction  of  price  in  January, 
they  would  give  jobbers  a  corresponding  rebate  on  such  nails 
bought  in  December  as  they  had  still  on  hand.  This  policy 
was  thereafter  followed  from  month  to  month  till  near  the 
breaking  up  of  the  association.  It  was  meant  to  induce  freer 
buying  by  the  jobbers  ;  but  its  success  was  slight.  The  demand 
for  nails  was  exceedingly  light  during  the  winter,  and  the  stag- 
nation propagated  itself  back  to  the  market  for  raw  material. 
In  a  market  report  of  January  2,  1896,  is  this  remark:  "Until 
there  is  an  improvement  in  the  wire  and  wire-nail  trades,  it  is  not 
likely  there  will  be  any  demand  for  rods."  On  January  16  it 
was  stated  from  Pittsburg  that  no  sales  of  rods  had  been  reported 
in  that  market  for  some  time.  Early  in  February  the  nail 
association  announced  an  advance  of  15  cents,  to  take  effect 
March  i.  This  galvanized  the  market  into  a  mild,  convulsive 
movement.  The  operation  was  repeated  in  April,  with  an  an- 
nouncement of  an  advance  of  15  cents  to  take  effect  May  i. 
Trade  was  very  dull,  however,  and  the  manufacturers  admitted 
that  the  market  was  a  good  deal  disturbed  by  outside  nails  and 
by  the  offerings  of  jobbers.  High  prices  had  so  curtailed  con- 


56  TRUSTS,   POOLS   AND   CORPORATIONS 

sumption  that  a  considerable  quantity  of  nails,  bought  before 
the  pool  was  formed  or  in  its  early  days,  was  probably  still  in 
the  jobbers'  hands.  These  formed  a  disturbing  element,  in  addi- 
tion to  the  growing  production  of  outside  factories. 

About  April  I,  1896,  the  makers  of  steel  billets  formed  a 
pool.  The  amount  of  billets  in  the  hands  of  middlemen,  or 
contracted  for  by  them,  was  so  great,  however,  that  the  attempt 
of  the  pool  to  raise  prices  $3  or  more  per  ton  was  only  partially 
successful.  The  wire-rod  makers  also  tried  to  form  a  pool,  but 
after  much  negotiation  were  unable  to  agree.  Their  good  under- 
standing, however,  seems  to  have  continued. 

Early  in  June  the  nail  association  succeeded  in  coming  to 
terms  with  the  Pittsburg  Wire  Co.  and  Baackes  &  Co.,  of  Pitts- 
burg,  by  which  these  companies  agreed  to  stop  making  wire  nails. 
Their  nail  mills  were  by  no  means  of  the  first  rank ;  but  they 
were  large  enough  to  make  a  considerable  figure  in  the  market 
under  the  existing  circumstances  of  very  small  consumption,  and 
they  had  been  selling  somewhat  below  the  association  price. 

If  the  statements  of  the  manufacturers  could  be  accepted 
freely,  we  should  need  to  explain  to  ourselves  the  rather  curious 
phenomenon  of  producers  keeping  the  price  of  their  product 
abnormally  high,  contrary  to  their  own  desires,  in  deference  to 
the  wishes  of  their  customers.  It  was  semi-officially  announced 
that  while  the  manufacturers  came  to  their  meeting  on  June  3 

with  the  general  expectation  that  some  action  would  be  taken  looking 
toward  a  reduction  in  price,  they  were  confronted  with  many  letters 
from  jobbers  emphasizing  the  injury  that  would  be  done  to  the  market 
by  the  reduction  in  the  price  of  so  staple  a  commodity  as  nails,  and 
urging  the  manufacturers  to  maintain  existing  prices.1 

Such  a  phenomenon  would  not  have  been  inexplicable  if  it 
had  existed ;  but  an  examination  of  twenty-nine  letters  of 
jobbers  on  the  situation,  published  about  that  time,  indicates 
that  it  was  essentially  a  myth.  Two  of  these  regarded  the 
price  as  a  matter  which  concerned  no  one  except  the  manu- 
facturers, and  which  no  one  else  ought  to  trouble  himself  about. 
Only  seven  could  be  counted  against  an  instant  reduction,  on 
any  construction  of  their  words.  Nineteen  either  were  opposed 

1  Ira!  .-lgf,  June  II.  1896.  p.  1384. 


THE    WIRE-NAIL   ASSOCIATION    OF    1895-96  57 

to  the  existing  high  prices  or  at  least  went  so  far  as  to  say  that, 
if  a  reduction  were  to  come  before  January  i  (a  matter  on  which 
they  expressed  no  opinion),  it  had  better  come  at  once.  The 
retailers  were  unanimous  for  reduction,  complaining  of  a  great 
falling  off  in  their  sales,  which  some  put  as  high  as  fifty  per 
cent.  They  reported  that  building  and  repairing  were  much 
interfered  with. 

Meantime  a  growing  number  of  small  mills  gave  the  association 
increasing  annoyance.  By  July  I  it  was  estimated  that  25,000 
kegs  a  month  were  made  by  outside  mills.  The  total  sales  for 
June,  by  the  association  and  outsiders,  were  estimated  at  90,000 
kegs ; 1  while  it  was  said  that  the  allotment  for  July  was  65,000 
kegs,2  and  that  the  associated  manufacturers  did  not  sell  so 
many.3  These  statements  were  made  by  the  Pittsburg  office  of 
the  Iron  Age,  which  was  at  the  centre  of  the  movement,  and 
which  ought  not,  it  would  seem,  to  have  sent  out  any  but  well- 
founded  statements  —  at  least  about  matters  so  definitely  fixed 
as  the  monthly  allotment.  There  is  reason,  however,  for  sup- 
posing that  these  figures  were  too  low.  A  man  who  knows  the 
innermost  history  of  the  combination  has  said  that  he  does  not 
think  there  was  any  month  in  which  the  manufacturers  in  the 
pool  did  not  sell  150,000  kegs.  This  statement  seems  modest 
enough,  considering  that  the  average  monthly  production  for 
1895  was  nearly  500,000  kegs. 

Rumors  of  concessions  and  irregularities  in  price  increased. 
On  September  i  the  guaranty  to  jobbers  on  each  month's  pur- 
chases against  decline  in  the  succeeding  month  was  discontinued. 
It  was  noted  with  satisfaction  that,  in  spite  of  the  low  prices 
which  had  to  be  made  to  meet  foreign  competition,  the  export 
trade  was  assuming  relatively  large  proportions.4  Early  in  Sep- 
tember several  outside  manufacturers  were  induced,  on  expensive 
terms,  to  withdraw  from  the  market.  It  was  claimed  that  the 
production  of  those  still  outside  was  insignificant ;  but,  in  spite 
of  this  claim,  the  association  lost  its  grip  on  prices  to  an  extent 
far  greater  than  at  any  earlier  time.  Chicago  was  the  centre  of 
greatest  disturbance.  Nails  were  openly  offered  there  by  jobbers 


58  TRUSTS,   POOLS  AND   CORPORATIONS 

at  $2.50,  and  finally  at  $2.25,  for  small  lots  from  store,  for  which 
the  association  price  was  $2.80.  The  demand,  however,  showed 
a  great  improvement  in  September,  and  it  continued  good  in 
October.  It  was  estimated  that  the  total  output  for  October 
would  be  about  250,000  kegs,1  or  about  half  the  average  monthly 
output  for  1895.  Soon  after  October  i,  the  manufacturers  suc- 
ceeded in  patching  up  the  trouble  at  Chicago ;  and  about  the 
1 5th  the  market  reports  said  that  there  was  "not  a  suspicion  of 
weakness  in  any  direction,"  and  that  the  association  had  "demon- 
strated its  ability  to  control  the  situation."  It  was,  nevertheless, 
hardly  two  weeks  before  the  final  break  appeared.  About  No- 
vember i  Chicago  jobbers  began  to  offer  nails  from  store  at 
$2.40.  The  break  spread  rapidly,  and  by  the  loth  the  associa- 
tion price  was  merely  nominal.  Demand  continued  light.  No 
one  bought  more  nails  than  he  had  to  have,  because  to-day's 
price  was  always  likely  to  be  bettered  to-morrow.  About  No- 
vember 20  nails  were  openly  offered  at  Chicago  at  $1.50  by  rep- 
resentatives of  association  mills.  On  December  i  the  association 
held  its  last  meeting,  adopted  a  new  card  of  extras,  and  formally 
dissolved.  The  new  extras  on  common  nails  are  as  follows : 

2O-d.  to  6o-d.  base 

lo-d.  "   i6-d.  £.05 

8-d.  and  g-d.  .10 

6-d.    "    7-cl.  .20 

4-d.    "    5-d.  .30 

3-d-  -45 

2-d.  .70 

This  schedule  makes  a  large  reduction  in  the  relative  price 
of  small  nails,  which  was  undoubtedly  intended  to  shut  out  the 
small  manufacturers  who  had  been  making  small  nails  only. 
The  new  card,  however,  comes  much  nearer  than  any  previous 
one  to  representing  the  relative  cost  of  large  and  small  nails, 
under  present  conditions  of  manufacture. 

II.     THE  COURSE  OF  PRICES 

When   it  is  said  that   nails  were  selling  on   May  I,    1895,  at 
$.85,  and  that  on  May  i,  1896,  the  association  made  the   price 

1  Iron  Age,  Oct.  29,  1896,  p.  837. 


.    THE    WIRE-NAIL   ASSOCIATION    OF    1895-96  59 

$2.55,  the  price  appears  to  have  been  multiplied  within  a  year 
exactly  by  three.  The  case  looks  still  worse  when  it  is  said  that 
6o-d.  nails  sold  in  1895  for  £.85  a  keg,  and  in  1896  for  $3.05. 
In  reality,  while  an  ordinary  bill  of  nails  would  have  cost  on 
May  i,  1896,  at  least  $1.70  per  keg  more  than  a  year  earlier, 
it  would  not  have  cost  three  times  as  much.  No  nails  were 
sold  at  the  nominal  base  price  in  1896;  and  though  6o-d.  nails 
were  nominally  sold  at  the  base  rate  before  the  change  of  card 
in  1895,  the  statement  that  the  price  of  6o-d.  nails  was  at  one 
time  $.85  gives  a  false  impression,  for  reasons  which  I  have 
explained.  A  comparison  of  base  prices  after  December  i,  1896, 
with  earlier  ones  is  altogether  misleading,  because  the  present 
extras  are  much  smaller.  It  has  been  estimated  that  a  well- 
assorted  order  of  nails  would  carry  an  average  extra  of  about 
$.62  on  the  old  card,  $.70  on  that  of  July  19,  1895,  and  $.12 
on  that  of  December  i,  I896.1  Perhaps  there  is  no  better  simple 
measure  of  the  actual  course  of  the  market  than  the  change 
in  the  price  of  8-d.  nails.  This  size  is  used  in  large  quantities ; 
and  when  assorted  orders  \vere  required,  the  extra  on  it  was 
the  same  as  the  required  average  of  extras.  But  this  does  not 
give  a  perfectly  true  idea  of  the  changes  of  price.  It  is  nec- 
essary to  remember  that  during  the  life  of  the  association  the 
prices  of  the  larger  nails  were  increased  even  more  by  the 
increase  of  the  extras  on  them. 

The  diagram  printed  below  shows  the  movement  during  1895 
and  1896  of  the  prices  of  8-d.  wire  nails,  of  No.  11  wire,  from 
which  these  nails  are  made,  of  wire  rods  and  of  steel  billets.  It 
is  based  upon  the  Pittsburg  quotations,  as  published  from  week 
to  \veek  in  the  Iron  Age.  No.  i  r  wire  costs  about  S.io  per  cwt. 
more  than  the  base  sizes  quoted  in  the  market  reports. 

Iron  and  steel  went  through  a  notable  boom  and  collapse  in 
181)5.  Without  any  marked  change  in  the  general  condition  of 
the  country,  without  any  corresponding  change  in  general  prices, 
without  any  strong  parallel  movement  in  other  countries,  the 
prices  of  crude  iron  and  steel,  and  other  prices  directly  depend- 
ent on  them,  rose  fast  and  steadily  for  some  five  months,  and  fell 
even  faster  in  the  next  three.  Between  April  i  and  September 

1  Iron  Age,  Dec.  10,  1896,  p.  1161. 


6o 


TRUSTS,    POOLS  AND   CORPORATIONS 


15  steel  billets  rose  more  than  sixty  per  cent,  while  by  December 
15  they  were  within  ten  per  cent  of  the  old  level.     It  is  not  easy 


1895 


1896 


$3.20 

3-io 
3.oo 

2. go 
2.80 
2.70 
2.60 
2.50 
2.40 

2.  ^O 


ffl 


^O? 


\ 


7\7 


i 


\J-  — 


{ 


\ 


l 


jftll  Mill  tV 


A 


.go 


k^A 


2 


x 


Wire  rods      iiiiiiiimiimii 
Steel  billets    »-o  pop 


to  get  a  fully  satisfactory  explanation  of  the  rise.     Near  the  end 
of  March  the  Carnegie  interests  contributed  to  start  it  by  very 


THE   WIRE-NAIL  ASSOCIATION    OF    1895-96  61 

large  purchases  of  iron.  About  the  same  time  the  H.  C.  Frick 
Coke  Company  announced  an  advance  of  fifteen  per  cent  in 
wages,  and  an  advance  of  more  than  thirty  per  cent  in  the  price 
of  coke,  to  take  effect  April  i  ; 1  and  other  coke  shippers  followed 
their  lead.  This  made  a  great  increase  in  the  cost  of  producing 
and  working  iron  and  steel.  A  little  later  labor  disputes  threat- 
ened to  stop  production;  and  when  they  were  settled,  it  was  by 
an  advance  of  wages.  Other  advances  were  announced  by  the 
great  steel  companies  during  May  and  June.  These  increases 
seemed  to  justify  and  to  fasten  the  higher  prices.  Men  gathered 
confidence  that  good  times  were  coming,  and  that  prices  were 
not  only  to  stay  up,  but  to  go  higher.  This  confidence,  react- 
ing, bred  demand  ;  and  renewed  demand  pushed  prices  higher 
and  higher.  The  success  of  the  nail  combination,  and  the  tem- 
porary activity  which  the  advance  in  nails  and  the  expectation 
of  advance  occasioned  in  the  market,  were  among  the  causes 
which  contributed  to  these  phenomena.  It  is  doubtful  whether 
the  rise  of  raw  material  had  the  slightest  influence  upon  the 
price  of  nails  ;  for  the  rise  of  nails  began  before  that  of  steel, 
was  eminently  artificial,  and  was  continued  after  the  raw  mate- 
rial had  sunk  nearly  to  its  former  price. 


III.    THE  INTERESTS  OF  DEALERS  AND  LABORERS 

The  unclesirability,  from  the  standpoint  of  those  who  want 
to  use  nails,  of  any  restriction  upon  the  use  of  them  and  of 
having  to  pay  high  prices  to  get  them,  is  too  obvious  to  be 
insisted  on.  The  retail  hardware  dealers  suffered  with  the  con- 
sumers. Their  sales  were  curtailed,  without  a  proportionate 
increase  in  their  profit  per  pound.  They  had  to  bear  the  brunt 
of  their  customers'  complaints  about  the  price  of  nails.  They 
complained,  also,  of  the  annovance  which  was  caused  by  the 
new  card  of  extras,  under  which  the  cheapest  nails  cost  fifty 
cents  per  keg  more  than  the  nominal  base  price.  \Yhen  their 
customers  saw  nails  quoted  in  the  papers  at  82.25,  it  was  hard 
to  convince  them  that  the  actual  wholesale  price  of  6o-d.  spikes 


62  TRUSTS,   POOLS   AND    CORPORATIONS 

was  $2.75.  The  jobbers,  on  the  other  hand,  made  large  profits 
on  the  stocks  which  they  bought  before  the  pool  was  formed, 
or  soon  after ;  and  they  were  enabled,  by  the  system  of  dis- 
counts and  rebates,  which  the  manufacturers  maintained,  to 
make  at  least  their  usual  profit  on  current  purchases.  This 
policy  was  meant  to  make  the  jobbers  friendly  to  the  associa- 
tion ;  and  it  seems  to  have  been  largely  successful. 

Some  of  the  mills  showed  a  disposition  to  raise  wages  as  they 
advanced  their  prices,  and  so  to  make  some  little  division  of 
profits  with  their  men.  It  was  reported  that  one  of  the  great 
companies  gave  its  men  an  advance  of  ten  per  cent  in  June, 
I8Q5,1  and  ten  per  cent  more  about  March  i,  1896  ;2  that 
another  raised  wages  ten  per  cent  in  July,  1895  ;3  and  that  a 
third,  after  a  strike,  in  September,  1895,  advanced  its  wire- 
drawers  ten  per  cent  and  fifteen  per  cent,  and  its  nail-makers 
five  per  cent.4  But  the  last-mentioned  company,  which  at  its 
full  capacity  employs  about  one  thousand  hands,  at  one  time 
cut  down  its  force  to  about  three  hundred.  This  reduction  is 
proportional  to  the  reduction  of  total  sales  from  500,000  kegs 
a  month  to  150,000.  It  seems  safe  to  assume  that  the  other 
companies  must  have  made  similar  reductions.  If  half  or  two- 
thirds  of  the  laborers  were  thus  thrown  out  of  work,  they  were 
not  much  helped  by  a  small  increase  in  the  rate  of  wages  paid 
to  the  rest. 

The  restriction  of  the  employment  of  labor  did  not  stop  at 
the  nail  mills  ;  there  was  a  diffused  effect  which  was  probably 
greater,  though  it  is  less  traceable.  There  is  reason  to  believe 
that  building,  and  especially  repairing,  were  perceptibly  re- 
tarded.0 To  raise  the  retail  price  of  a  keg  of  nails,  say  from 
two  dollars  to  four,  must  under  any  circumstances  diminish  pur- 
chases to  some  extent.  The  effect  will  be  greater  if  the  circum- 
stances make  it  seem  likely  that  the  rise  is  temporary.  In  the 
present  case,  there  was  the  added  influence  of  a  lively  conviction 
of  the  buyers  that  the  manufacturers  were  trying  to  roll  them. 
If  a  man  thinks  that  an  effort  is  made  to  impose  upon  him,  he 


THE    WIRE-NAIL    ASSOCIATION    OF    1895-96  63 

will  often  subject  himself  to  a  good  deal  of  inconvenience,  for 
the  satisfaction  of  thinking  that  he  has  not  been  imposed  on.  It 
is  likely  that  thousands  of  men  did  without  improvements  which 
they  could  not  afford  to  do  without,  because  they  would  not  sub- 
mit to  what  they  regarded  as  the  arbitrary  demands  of  the  nail 
combination.  It  was,  perhaps,  in  part  because  the  manufac- 
turers left  this  moral  effect  out  of  their  reckoning,  that  the  extent 
of  the  diminution  of  demand  took  them  by  surprise.  Their 
calculations  doubtless  accorded  with  the  view  recently  expressed 
by  a  small  manufacturer,  who  experienced  a  strong  demand 
while  the  association  lasted,  because  he  sold  nails  a  little  under 
the  association  price.  He  said  : 

I  do  not  think  that  the  high  price  of  nails  restricted  consumption  to  any 
perceptible  extent.  The  item  of  nails  in  the  cost  of  building  is  a  very 
small  one,  and  it  was  not  over  five  or  six  years  ago  that  the  price  was 
about  the  same  as  that  fixed  by  the  recent  combination. 

Consumption  was  not  so  small  as  production  during  the  last 
months  of  1895,  or  perhaps  during  the  early  months  of  1896, 
while  the  jobbers  still  had  some  part  of  the  stocks  which  they 
had  laid  in  about  the  time  the  pool  was  formed.  But  the  best 
information  obtainable  makes  it  appear  that,  during  1896,  con- 
sumption as  well  as  production  must  have  been  small  beyond 
any  possible  expectation. 

IV.     THE  INTEREST  OF  THE  MANUFACTURERS 

It  is  apparently  the  general  opinion  that,  quite  aside  from 
any  consideration  of  the  public  welfare,  and  looking  only  to  the 
pecuniary  interest  of  the  manufacturers,  the  combination  car- 
ried the  policy  of  high  prices  too  far.  The  association  went  to 
pieces  after  eighteen  months,  and  prices  went  down  to  their 
former  level ;  therefore  it  is  assumed  that  the  combination  failed 
or,  at  least,  that  it  would  have  accomplished  its  purpose  more 
fully  by  a  more  moderate  policy.  The  matter  does  not  seem  to 
me  so  simple.  Mr.  Parks,  who  was  undoubtedly  the  guiding 
spirit  in  the  whole  transaction,  went  into  it  with  eyes  very  wide 
open.  He  had  already  been  connected  with  several  tack  com- 
binations managed  on  the  same  principles.  Of  course  they  came 


64 

to  a  rather  speedy  end ;  but  Mr.  Parks  seems  to  have  counted 
their  experience  as  favorable,  on  the  whole,  to  the  policy  of  a 
short  life  and  a  merry  one  for  pools.  Moreover,  he  still  main- 
tains the  wisdom  of  the  course  that  he  counselled.  When  the 
association  collapsed,  he  said  that  it  had  lived  longer  than  its 
most  sanguine  promoters  expected,  and  as  a  financial  undertak- 
ing had  been  an  unprecedented  success.1  The  manner  of 
argument  of  a  man  who  was  connected  with  the  association 
throughout  its  existence  is  as  follows  : 

Suppose  we  had  put  up  the  price  $.15  a  keg.  A  great  many  men  who 
had  had  their  eye  on  the  nail  business,  would  have  said  :  "Those  men 
have  put  up  the  price  $.15,  and  they  will  probably  make  it  $.25.  There 
is  going  to  be  money  in  the  nail  business.  I  will  go  in."  But  when  we 
put  up  the  price  $1.50,  they  said:  "Those  fellows  are  lunatics.  They 
can't  hold  together.  There  will  be  a  smash  before  they  get  fairly  started. 
I  will  keep  out  of  that  business."  As  a  matter  of  fact,  we  had  hardly 
any  new  competition  during  the  first  year  of  the  association.  The  new 
competition  came  mostly  after  the  beginning  of  the  second  year.  Then 
men  began  to  say  :  "  Those  fellows  have  kept  together  twelve  months, 
and  they  will  probably  do  it  a  while  longer.  They  are  making  a  lot  of 
money.  I  will  try  to  get  a  slice  of  it."  I  am  sure  we  kept  the  associa- 
tion going  longer  with  a  high  price  than  we  could  have  kept  it  going  with 
a  low  price.  I  don't  believe  it  would  have  lasted  six  months  with  a  raise 
of  $.25.  The  high  price  frightened  off  some  people,  and  gave  us  plenty 
of  money  to  buy  off  the  rest. 

It  is  hardly  possible  to  over-emphasize  the  distinction  between 
the  great  consolidations  of  which  the  so-called  sugar  trust  may 
be  taken  as  a  type  —  consolidations  which  it  may  not  be  improper 
to  distinguish  specifically  as  trusts,  because  the  typical  examples 
were  first  united  under  the  proper  trust  form  of  organization  — 
and  pools  like  the  nail  association.  The  broad  differences  of  or- 
ganization have  their  root  partly  in  the  conditions  of  the  businesses 
concerned,  and  partly,  it  may  be,  in  the  mental  characteristics 
of  the  managers;  and  they  issue  in  great  differences  of  policy 
and  power.  It  would  probably  not  be  impossible  to  bring  the 
making  of  wire  nails  under  the  control  of  one  great  company  ; 
but  it  would  be  much  more  difficult  than  it  was  to  do  the  like 

1  Iron  .\gc,  Bee.  3,  1896,  p.  lioS. 


THE   WIRE-NAIL  ASSOCIATION    OF    1895-96  65 

with  the  refining  of  sugar.  To  refine  sugar  by  methods  com- 
mercially practicable  to-day,  a  man  must  have  hundreds  of  thou- 
sands of  dollars  to  put  at  the  risk  of  the  business.  With  ten 
thousand  dollars  and  six  weeks'  time,  however,  any  man  who 
likes  can  become  a  manufacturer  of  wire  nails.  A  little  factory 
can  make  them,  not  quite  so  cheaply  as  the  great  establishments 
which  make  their  own  wire,  but  at  no  very  great  disadvantage. 
It  needs  only  a  small  rise  above  the  lowest  price  at  which  the 
best  mills  can  pay  interest  on  the  cost  of  their  plants,  to  enable 
an  indefinite  number  of  small  mills  to  start,  making  each  its 
twenty-five  or  fifty  kegs  per  day.  This  is  the  weakness  of  any 
form  of  combination  in  a  business  of  this  character  —  the  pos- 
sibility of  a  new  factory  in  every  thriving  town. 

No  limit  can  be  named  to  the  success  of  skilful  and  deter- 
mined managers  of  a  centralized  combination  or  trust,  in  any 
line,  in  crushing  competition.  An  abnormal  lowering  of  price 
in  the  local  field  of  a  small  competitor  is  a  weapon  which  needs 
nothing  but  persistence  to  make  it  inevitably  fatal  to  him; 
and  the  revenues  which  the  trust  draws  constantly  from  other 
fields,  even  if  it  loses  in  the  region  of  cut  prices,  give  it  an 
unlimited  power  of  persistence.  There  is  no  doubt  of  the 
trust's  ability  to  destroy  any  competitor  of  a  size  which  does  not 
approach  its  own.  This  process  is  troublesome,  however,  and 
somewhat  expensive  ;  and  in  a  case  in  which  new  competitors 
can  spring  up  with  so  little  money  and  in  so  short  a  time,  the 
query  is  whether  the  situation  of  the'  trust  would  not  be 
unpleasantly  like  that  of  a  man  fighting  with  mosquitoes. 

It  probably  would  be  so,  unless  the  trust  should  be  content 
with  a  policy  of  greater  moderation  in  its  profits  than  any  trust 
has  yet  had  the  self-denial  to  adopt.  Any  trust,  having  once 
got  control  of  the  market,  could  make  it  impossible  for  any 
competitor  to  establish  a  business  which  would  pay  a  profit  for 
a  clay,  or  would  need  any  attention  from  the  trust  to  make  it 
disappear.  This  possibility  depends  upon  the  power  of  the 
trust  to  do  for  society  such  service  as  no  competitor  could  do. 
The  representatives  of  the  trusts  have  not  been  negligent  in 
setting  forth  the  economies  which  they  are  able  to  effect:  the 
production  of  all  goods  by  the  most  efficient  plants ;  the  uni- 


66  TRUSTS,    POOLS   AND   CORPORATIONS 

versal  use  of  all  improvements,  patented  or  not ;  the  econo- 
mizing and  full  use  of  expert  knowledge;  the  incorporation  of 
subsidiary  industries,  like  the  making  of  packages ;  the  saving 
of  transportation  by  shipping  from  the  factory  nearest  the  con- 
sumer. Greatest  of  all,  perhaps,  and  most  decisive,  because  it 
is  the  economy  that  is  absolutely  out  of  the  reach  of  a  competi- 
tor, is  the  commercial  economy  that  depends  upon  the  control 
of  the  market  —  the  saving  of  the  expense  of  inducing  cus- 
tomers to  buy  of  this  concern  and  not  of  that.  A  trust  which 

J 

should  make  over  the  greater  part  of  these  savings  to  its  cus- 
tomers, and  should  content  itself  with  prices  which  would  give 
it  only  fifteen  or  twenty  per  cent  per  annum  on  the  value  of  its 
productive  property,  as  measured  by  the  cost  of  replacing  it, 
would  probably  never  be  troubled  with  any  shadow  of  competi- 
tion. But  the  general  conclusion  of  competent  and  disinterested 
investigators  seems  to  be  that,  up  to  the  present  time,  every 
trust,  when  its  control  of  the  market  has  been  established,  has 
not  only  kept  the  whole  of  the  savings  of  consolidation  to 
itself,  but  has  taken  from  the  public  something  besides,  making 
prices  somewhat  higher  than  they  would  have  been  under  full 
competition. 

The  form  of  organization  of  a  pool  is  less  unattractive  than 
that  of  a  full  consolidation,  to  a  man  who  values  his  indepen- 
dent position  and  dislikes  to  become  an  employee  ;  but  there 
is  in  it  as  much  less  power  as  there  is  less  unity.  Under  a  pool, 
the  economy  of  closing  some  establishments  may  be  effected 
by  paying  them  a  bonus,  as  was  clone  for  years  by  the  steel-rail 
pool.  The  nail  men  dealt  with  outside  mills  by  this  plan,  but 
under  circumstances  and  in  a  way  which  hardly  permit  it  to  be 
regarded  as  an  economy.  It  is  probable  that  a  pool,  with  pro- 
duction strictly  limited  to  what  the  market  will  easily  absorb  at 
the  prices  fixed,  might  make  some  saving  in  the  commercial 
expenses  of  advertising  and  selling,  particularly  if  the  circum- 
stances and  the  policy  of  the  pool  were  such  as  to  give  it  a 
character  of  comparative  permanence.  The  nail  men  were 
probably  not  able  to  make  any  savings  of  this  class.  The 
other  economies  which  are  possible  to  a  trust  seem  to  be  out 
of  the  reach  of  a  poo],  while  the  central  organization  and  the 


THE   WIRE-NAIL   ASSOCIATION    OF    1895-96  67 

system  of  mutual  watching  seem  even  to  add  something  to 
the  cost  of  superintendence.  It  is  probably  safe  to  say  that 
nearly  all  the  gain  which  any  manufacturers  may  make  through 
a  pool  is  made  by  raising  their  selling  prices. 

It  can  be  maintained  with  a  good  show  of  reason  that  the 
nail  men  would  have  got  more  profit  in  the  course  of  years  from 
the  policy  of  full  consolidation,  with  prices  permanently  fixed 
low  enough  to  make  competition  impossible.  But  experience 
has  not  yet  shown  this  policy  to  be  practically  attainable  in  our 
present  stage  of  civilization.  Between  that  extreme  and  the 
other,  which  the  nail  men  chose,  it  is  doubtful  whether  there  is 
any  mean  which  they  would  have  found  golden.  The  choice 
practically  open  to  them  appears  to  have  lain  between  a  tolera- 
bly large  profit,  which  might  possibly  last  two  or  three  years, 
and  a  very  large  one,  which  might  be  expected  to  last  six  months 
or  a  year.  They  chose  the  very  large  one  ;  and  they  kept  it,  or 
at  least  kept  the  price  up,  for  eighteen  months.  It  is  true  that 
a  very  large  part  of  the  profits,  especially  in  the  later  months, 
was  consumed  in  subsidies  and  other  expenses  of  the  association. 
Some  well-informed  men,  intimately  connected  with  the  trade 
and  friendly  to  the  manufacturers,  think  that  their  policy  was 
short-sighted.  The  question  has  more  sides  than  one,  how- 
ever, and  it  seems  possible  to  make  out  a  very  good  case  for  the 
view  that  the  manufacturers  did  not  choose  the  least  profitable 
course. 

Y.     THF.  INTEREST  OF  THE  PUBLIC 

It  may  not  make  much  difference  to  the  manufacturer  whether 
he  reduces  his  costs  or  raises  his  selling  price  ;  but  it  makes  a 
great  difference  to  the  consumer.  Aside  from  any  lowering  of 
prices,  it  is  to  the  public  interest  that  economies  be  made  —  that 
a  given  product  be  obtained  with  less  cost  and  less  exertion.  It 
a  consolidated  trust  would  sell  as  cheaply  as  competing  producers 
would  have  to  sell,  keeping  to  itself  the  whole  of  its  economies 
but  taking  nothing  more,  the  economies  would  benefit  the  public 
somewhat  in  the  end.  The  production  of  wealth  and  the  sum 
of  capital  are  certainly  increased  by  them  ;  and  such  increase  of 


68  TRUSTS,   POOLS  AND   CORPORATIONS 

capital  and  of  production  tends  in  itself  to  the  general  good.  The 
actual  policy  of  the  trusts,  in  taking  from  the  public  something 
in  higher  prices  besides  their  gain  through  saving,  complicates 
the  question  ;  but  there  is  a  very  considerable  gulf  between  the 
effects  of  a  trust,  like  the  American  Sugar  Refining  Co.,  and  the 
effects  of  a  pool,  like  the  Nail  association.  The  actual  lessen- 
ing of  the  human  effort  that  is  required  for  a  given  result  does 
accompany  the  trust,  and  we  all  are  privileged  at  least  to  cherish 
the  pious  hope  that  some  small  fraction  of  the  gain  may  ulti- 
mately work  its  way  around  to  us.  The  pool,  on  the  other  hand, 
does  not  effect  any  saving  of  human  effort.  Its  avowed  purpose 
is  to  increase  its  members'  share  of  the  products  of  such  effort. 
Its  form  of  organization  is  probably  incapable  of  producing  the 
greater  part  of  the  social  benefits  which  the  trusts  lay  claim  to ; 
and  it  does  not  make  much  pretence  of  trying  to  produce  them. 
The  claim  of  the  trusts  to  a  socially  desirable  effect  on  price 
takes  two  forms  —  that  they  make  prices  lower  and  that  they 
make  them  steadier.  The  former  effect  has  probably  not 
appeared  permanently  in  any  instance  ;  and  the  latter  does  not 
seem  to  have  appeared  generally.  Both  effects  are,  however, 
within  their  power.  Unsteadiness  of  price,  so  far  as  it  results 
from  the  action  of  trusts  which  have  once  established  their  con- 
trol of  the  market,  is  generally  the  result  of  high  prices.  The 
raising  of  prices  above  the  competitive  level  causes  competition 
to  develop  ;  and  competition  can  be  dislodged  only  by  buying 
it  out  or  by  sinking  prices  below  the  competitive  level.  The 
trusts  are  regarded  by  their  managers  as  permanent  institutions, 
and  they  tend  toward  the  policy  which  the  managers  think  likely 
to  bring  the  greatest  net  revenue  in  the  long  run.  They  tend 
toward  a  comparatively  moderate  forcing  of  present  profits,  with 
a  fair  degree  of  attention  to  the  future.  In  consequence,  if  the 
prices  of  their  goods  are  not  steadier  than  they  would  be  under 
full  competition,  they  are  probably  not  much  less  steady.  The 
nail  poo],  on  the  other  hand,  was  an  ephemeral  thing,  designed 
for  a  quick  rush  into  the  market,  a  grasping  of  whatever  gains 
might  be  within  reach,  and  then  —  collapse.  Its  purpose  was 
that  of  a  corner  —  to  get  the  greatest  possible  amount  of  profit 
out  of  those  who  had  to  have  nails  within  a  limited  time.  Its 


THE   WIRE-NAIL  ASSOCIATION    OF    1895-96  69 

effect,  therefore,  was  a  great  exaggeration  of  the  normal  unsteadi- 
ness of  prices. 

Too  great  productive  capacity  is  one  of  the  reasons  which 
are  regularly  given  for  forming  combinations.  The  providing 
of  machinery  for  making  far  more  goods  than  are  demanded  at 
the  necessary  prices  is  one  of  the  wastes  of  competition.  Of 
course  it  would  not  be  practicable,  with  the  completes!  centrali- 
zation, to  keep  the  nominal  capacity  of  machinery  down  to  the 
actual  demand ;  for  variations  in  the  quantities  demanded,  vari- 
ations in  the  kinds  demanded,  the  necessity  of  being  able  to 
make  many  kinds  at  each  of  several  places  —  all  forbid  an  exact 
adjustment.  There  is  no  doubt,  however,  that  here  a  trust  can 
effect  a  saving  over  competitive  methods,  though  it  may  nullify 
this  benefit  more  or  less  completely  by  stimulating  new  compe- 
tition through  too  high  prices.  The  policy  of  the  nail  pool,  on 
the  other  hand,  greatly  stimulated  the  tendency  to  the  over- 
production of  machinery.  The  association  tried  to  check  it  by 
subsidies  to  machinery-makers,  but  with  only  partial  success. 
Such  makers  of  nail  machinery  as  would  accept  orders  were 
overwhelmed  with  them.  It  was  said  that  persons  anxious  to 
get  into  the  nail  business  "  overbid  each  other,  and  lucky  buyers 
of  machines  were  offered  premiums  for  their  bargains."  1  When 
the  pool  collapsed,  the  machines  which  the  artificially  stimulated 
demand  had  called  forth  became,  for  the  most  part,  dead  prop- 
erty. Both  to  the  owners  and  to  society,  they  are  an  almost 
entire  waste  of  capital. 

In  this  way  the  pool  aggravated  one  of  the  fundamental  diffi- 
culties of  the  situation  which  it  was  formed  to  change.  This 
is,  perhaps,  its  most  visibly  lasting  effect,  and  from  it  a  serious 
obstacle  arises  in  the  way  of  renewing  the  pool.  So  far  as  their 
current  business  is  concerned,  the  manufacturers  might  have 
been  in  no  very  different  position  if  the  pool  had  not  been 
formed.  The  price  of  nails  is  now  about  the  same,  allowing 
for  the  change  of  extras,  as  in  the  spring  of  1895.  Of  the 
hundreds  of  new  machines  which  were  set  up  during  the  eigh- 
teen months  of  fever,  a  large  part  have  ceased  to  turn  out  nails, 
and  as  the  months  go  by,  others  will  cease.  Some  of  the  older 

1  Iron  Age,  Dec.  10,  iSi)6,  p.   1147. 


70  TRUSTS,    POOLS   AND   CORPORATIONS 

and  less  efficient  will  go,  one  by  one,  to  the  scrap  pile,  and  some 
of  the  newer  may  replace  them.  With  the  continued  progress 
of  invention  the  rest  will  doubtless  grow  relatively  less  and  less 
efficient.  The  growth  of  the  country,  too,  will  make  a  fixed 
number  of  machines  continually  less  important  as  a  possible 
factor  in  the  market.  These,  however,  are  processes  of  years. 
For  a  long  time  to  come  the  hundreds  of  machines  which  stand 
ready  to  start  at  a  week's  notice  must  be  reckoned  with  by  any 

J  J  •* 

new  combination.  A  small  manufacturer,  who  was  not  in  the 
pool,  wrote  in  February,  1897  :  "I  doubt  if  there  will  be  another 
combine  for  a  year,  but  I  think  it  will  ultimately  come."  It  will 
come,  as  surely  as  seedtime  and  harvest ;  but  not  in  one  year,- 
nor,  in  all  probability,  in  two.  It  will  probably  not  be  possible, 
until  several  years  have  gone  by,  to  form  another  association 
which  shall  effectively  control  the  market. 


VI.     CONCLUSIONS 

Only  two  rather  small  classes  are  probably  ready  to  give 
thanks  for  the  concentrations  of  industrial  and  social  power 
which  are  loosely  covered  by  the  name  of  trusts  —  those  who 
draw  wealth  and  power  from  them,  and  those  who,  desiring  a 
general  absorption  of  the  control  of  production  by  society,  think 
that  the  trusts  are  forwarding  their  aim  ;  and  some  of  the  former 
class  perhaps  would  not  give  thanks  without  certain  baitings  of 
conscience,  while  many  of  the  latter  account  the  case  as  one  of 
those  in  which  God  makes  the  wrath  of  man  to  praise  him.  But 
-in  unfavorable  judgment  of  the  economic  and  social  effects  of 
an  institution  docs  not  at  all  involve  an  unfavorable  ethical  judg- 
ment of  the  men  who  visibly  represent  it  —  at  least  in  compari- 
son with  the  rest  of  the  community.  The  members  of  the  Nail 
association  did  what  the  rest  of  us  would  have  done  in  their 
places.  One  who  was  active  in  forming  the  association  gives 
this  statement  of  their  point  of  view: 

There  is  nail  machinery  enough  in  this  country  to  produce  four  times 
as  many  nails  as  ran  be  sold.  When  there  is  no  pool  the  makers  simply 
rut  each  other's  throats.  Some  people  think  there  is  something  wicked 


THE    WIRE-NAIL   ASSOCIATION    OF    1895-96  71 

about  pools.  When  we  were  trying  to  get  up  the  nail  pool,  I  talked 
with  directors  of  companies  who  held  up  their  hands  against  going  into 
any  sort  of  combination.  I  said  to  them,  "  How  much  did  you  make 
last  year  ?"  "Not  a  cent."  "Are  you  making  anything  now  ?"  "No." 
"Well,  what  do  you  propose  to  do  ?  Sit  here  and  lose  what  capital  you 
have  got  in  the  business?"  Some  of  them  thought  they  could  run 
along  until  some  of  the  weak  concerns  died  off.  But  I  tell  you  plants 
don't  die.  If  a  concern  fails,  they  reorganize  it.  They  buy  in  the  plant 
cheap,  they  have  got  rid  of  the  old  debts,  and  they  are  in  better  shape 
to  compete  than  ever.  There  is  only  one  way  to  make  any  money  in  a 
business  like  the  nail  business,  and  that  is  to  have  a  pool. 

This  is  the  aspect  that  things  would  wear  to  us  if  we  were  in 
the  position  of  the  manufacturers.  Some  of  us  are  perhaps 
opposed  to  combinations ;  but  so  were  some  that  went  into  the 
nail  pool.  In  weighing  any  man's  opposition  to  combinations, 
it  may  be  doubted  whether  it  is  of  the  sort  to  keep  him  out  of 
them,  till  he  has  sailed  the  strait  between  failing  profits  and  the 
trust,  and  has  passed  the  siren  voice. 

The  trusts  simply  do,  with  larger  resources  and  higher  organi- 
zation, the  things  that  every  manager  of  a  competitive  business 
is  trying  to  do.  It  is  possible  that  we  see  the  character  of  such 
things  better  when  they  are  done  on  the  larger  scale  ;  it  may  be 
one  of  the  missions  of  the  trusts  to  give  us  clearer  and  higher 
notions  of  ethics.  But  it  seems  probable  that,  if  we  begin  to 
cast  stones,  the  houses  of  the  trusts  will  not  be  the  only  ones  to 
suffer.  If  it  is  asserted  to  be  wrong  to  crowd  up  the  prices 
of  the  things  we  sell  and  to  crowd  down  the  prices  of  things  we 
buy,  wrong  to  make  our  business  large  by  the  destruction  of  our 
neighbor's,  a  good  deal  may  be  said  for  the  ethical  superiority 
of  the  altruistic  man  who  should  refuse  to  do  these  tilings;  but  no 
ethical  distinction  can  be  drawn  between  the  man  who  does  them 
strongly  and  successfully  and  the  man  who  is  only  able  to  do 
them  with  less  strength  and  less  success. 

The  mechanism  of  the  trust,  properly  so  called,  is  perhaps 
not  unworthy  to  be  ranked  among  the  greatest  inventions  of 
this  centurv,  either  as  a  monument  oi  intellectual  acuteness  or 
as  an  engine  of  momentous  social  effects.  Like  most  of  those 
other  inventions  which  are  more  unanimouslv  classed  as  useful, 


72  TRUSTS,   POOLS  AND   CORPORATIONS 

and  for  which  individuals  get  credit,  the  invention  of  the  trust 
did  not  really  depend  on  the  activity  of  any  particular  men.  If 
neither  Bell,  nor  Reis,  nor  McUonough,  nor  Edison  had  lived, 
a  score  of  other  men  were  looking  for  the  telephone,  and  would 
soon  have  discovered  it.  Scientific  and  technical  knowledge  had 
reached  a  point  from  which  it  could  not  but  be  discovered ;  and 
no  man  could  do  more  than  hasten  the  discovery  by  a  little. 
Just  so,  the  development  of  the  pool,  the  trust,  and  the  giant 
consolidated  corporation  was  inevitable  in  the  social  and  eco- 
nomic conditions  of  our  age.  If  the  world  had  lacked  Mr. 
Rockefeller  and  his  associates,  it  had  other  men  of  business 
and  other  lawyers ;  and  it  would  not  long  have  lacked  the 
trust 

CHARLES  E.  EDGERTON. 


IV 

INDUSTRIAL   POOLING   AGREEMENTS1 

POOLING  agreements  are  occasionally  brought  to  light  by 
the  courts  ;  but  a  large  number  live  and  die  in  obscurity, 
without  interference,  and  without  attracting  attention  from  the 
general  public.  This  form  of  combination  has  been  strength- 
ened and  extended  simultaneously  with  the  growth  in  size 
of  our  manufacturing  companies.  The  present  industrial  com- 
binations, which  succeeded  the  downfall  of  the  trust  organi- 
zations condemned  by  the  courts  more  than  a  decade  ago,  have 
not  obviated  the  necessity  for  these  pooling  agreements.  As  a 
matter  of  fact  they  seem  at  the  present  time  rather  to  have  stimu- 
lated a  revival ;  for  a  considerable  number  of  combinations  are 
now  parties  to  the  very  form  of  agreement  which  they  were  ex- 
pected to  supersede.  For  this  reason,  as  an  important  factor  in 
the  determination  of  prices,  especially  at  this  present  time  of  low 
ebb  in  the  fortunes  of  the  combinations  formed  in  1899-1900, 
the  character  and  power  of  these  agreements  deserve  study. 

Certain  features  are  common  to  nearly  all  forms  of  pooling. 
Manufacturers  desiring  to  form  a  pool  usually  create  an  unin- 
corporated organization,  such  as  the  Bessemer  Steel  Associa- 
tion, the  Merchants'  Ore  Association,  or  the  Steel  Rail 
Association.  All  agree  to  maintain  a  schedule  of  prices  fixed 
by  the  association,  and  to  limit  their  production  accordingly. 
Each  manufacturer  is  allowed  to  produce  (or  sell)  only  a  certain 
percentage  of  the  whole  output,  depending  upon  the  capacity 
and  advantages  of  his  plant.  To  prevent  violation  of  the  agree- 
ment, a  money  deposit  is  often  required  from  each,  forfeitable 
to  the  association.  In  many  of  the  more  intricate  cases,  the 


74  TRUSTS,    POOLS   AND    CORPORATIONS 

agreement  is  drawn  up  by  counsel  in  New  York,  Pittsburg,  or 
Chicago,  the  lawyers'  offices  being  used  as  headquarters  for 
the  association.  The  duties  of  the  legal  firm  often  include,  at 
the  same  time,  the  auditing  and  verification  of  reports  from  the 
various  companies.  To  do  this  work,  a  large  force  of  expert 
accountants  may  be  employed.  A  fine  is  imposed  where  these 
reports  show  a  production  greater  than  the  allotted  percentage, 
and  a  corresponding  bonus  is  given  to  plants  producing  less  than 
their  allotment. 

The  regular  meetings  of  the  representatives  of  the  constituent 
companies  are  held  usually  in  November  or  December,  in  order 
to  adjust  prices  and  allotments  for  the  ensuing  year.  On  account 
of  the  non-enforceability  of  the  agreement  the  minority  must  be 
treated  fairly.  Their  withdrawal  would  mean  the  breaking  up 
of  the  association.  The  money  deposit  restrains  the  members 
from  withdrawal  only  when  under  slight  provocation.  The 
affairs  of  the  pool  are  handled  by  the  united  action  of  the  ablest 
men  in  the  business.  Each  owner  can  manage  and  develop  his 
own  plant,  with  every  inducement  to  reduce  expenses.  He 
knows  very  closely  the  amount  of  his  annual  output,  so  that  the 
most  economical  production  would  seem  possible  under  such  an 
arrangement. 

Territorial  division  of  the  market  was  a  feature  of  the  rail- 
road pools,  but  has  not  been  adopted  by  many  industrial  associa- 
tions. This  end  is  sometimes  loosely  accomplished  by  making 
all  factory  prices  uniform,  and  adding  the  freight  from  factory 
to  selling  place  to  obtain  the  price  at  that  point.  Thus,  in  the 
iron  and  steel  associations,  prices  are  usually  figured  from  a  base 
price  at  Pittsburg.  The  amount  of  the  freight  from  this  base  to 
the  selling  point  must  be  added  to  the  base  price,  to  obtain  the 
selling  price.  For  example,  if  the  Pittsburg  base  price  of  steel 
plates  is  81.40  per  hundred  pounds,  and  the  freight  from  Pitts- 
burg to  Iowa  is  35  cents,  the  price  in  Iowa  is  81.75,  whether 
a  Chicago  or  a  Philadelphia  concern  does  the  selling.  This 
operates  to  prevent  waste  in  transportation  by  keeping  ship- 
ments moving  in  directions  away  from  the  base  point.  Ship- 
ments made  toward  it  suffer  a  loss  in  selling  value  as  well  as  by 
reason  of  the  expense  for  freight.  Only  very  strong  local  in- 


INDUSTRIAL    TOOLING    AGREEMENTS  75 

terest  can  secure  such  a  schedule,  increasing  still  further  the 
strength  of  its  position. 

Several  pools  have  omitted  the  feature  of  percentage  allot- 
ment, and  have  placed  a  tax  upon  all  manufacturing.  These 
are  familiar,  as  they  have  come  before  the  courts.  In  the  case 
of  the  Candle  Manufacturers'  Association,1  formed  in  Ohio  in 
1880,  the  members  were  required  to  pay  into  the  treasury 
2\  cents  for  every  pound  of  candles  sold.  A  more  modern 
pool,  the  Addyston  Pipe  and  Steel  Company,  had  an  elaborate 
system  by  which  it  fixed  the  price  that  a  city  should  pay  for 
pipe,  and  then  gave  the  contract  to  the  member  offering  to  pay 
to  the  pool  the  highest  amount  for  it.  The  others  put  in  bids 
to  cover  appearances,  but  took  care  to  name  a  higher  price  than 
that  agreed  upon.  Certain  companies  were  permitted  to  take 
all  the  contracts  let  by  large  cities  near  them,  called  "reserve" 
cities.  In  1899  the  Sherman  Act  was  successfully  invoked  to 
terminate  this  arrangement.2 

An  entirely  different  form  of  avoiding  competition  is  through 
the  adoption  of  a  joint  sales  agent.  The  various  firms  agree 
to  sell  only  through  a  certain  agent  or  selling  corporation.  This 
agent  contracts  with  each  firm  separately,  but  guarantees  a 
uniform  selling  price.  He  also  disposes  of  the  goods  from 
different  firms  in  a  given  ratio.  This  ratio  may  be  fixed  or 
may  vary  with  agreed  conditions.  An  exported  article  would 
be  advantageously  controlled  in  this  way.  An  arrangement  of 
the  same  sort  is  most  common  in  the  case  of  articles  not  patented, 
and  of  long  established  use  and  approximately  standard  design. 
The  Union  Blue  Stone  Company3  in  this  way  effected  all  the 
sales  for  the  Blue  Stone  Association,  fixing  the  price  to  be 
charged  and  the  quota  to  be  furnished  by  each  member. 

Still  another  form  of  pool  is  based  upon  patents  essential  to 
the  manufacture  of  the  article.  The  patentee  sells  the  rights  of 
use,  for  a  uniform  royalty,  to  all  who  apply.  He  also  limits  the 
quota  to  be  produced  by  each  firm,  above  which  amount  the 
royalty  increases  rapidly.  Various  ways  by  which  patents  may 
be  used  to  control  production  have  been  adopted.  Thus,  for 
example,  the  United  States  Consolidated  Seedless  Raisin  Com- 

S.  97.  'A  164  N.  V.  401. 


76  TRUSTS,   POOLS  AND   CORPORATIONS 

pany  was  an  association  of  nine  California  firms,  owning  all  the 
patented  raisin-seeding  machinery.  Members  of  the  company 
paid  a  royalty  of  |  cent  per  pound,  but  outside  firms  were  to 
pay  J  cent.  This  form  of  agreement  the  courts  have  upheld  as 
legal.1  In  another  case  —  that  of  the  National  Harrow  Com- 
pany—  the  manufacturers  agreed  to  pay  to  the  owner  of  the 
patents,  Si  royalty  on  each  harrow  sold,  and  $4  additional  on 
every  harrow  sold  for  less  than  a  stipulated  price.  This  form 
of  agreement,  unlike  the  preceding  one,  was  held  to  be  unen- 
forceable at  law.2 

It  is  common  knowledge  that  pooling  agreements  of  one  sort 
or  another  are  numerous  at  the  present  time,  but  the  secrecy 
with  which  they  are  guarded  makes  it  difficult  to  discover  their 
real  extent  and  character.  A  single  New  York  law  firm,  a  few 
months  ago,  making  a  specialty  of  these  associations,  superin- 
tended no  less  than  thirty-nine,  each  covering  some  manufactured 
product  in  the  metal  trades.  But  pools  are  not  restricted  to  the 
iron  and  steel  business.  They  cover  a  wide  range  of  industry. 
A  part  of  Mr.  C.  M.  Schwab's  testimony  before  the  Industrial 
Commission  bears  upon  this  point.3 

In  the  iron  and  steel  trade,  however,  there  would  seem  to  be 
the  majority  of  these  pooling  associations  and  price  agreements 
in  operation.  As  soon  as  the  ore  is  dug,  it  is  regulated  by  an 
association.  The  "  independent  "  ore  producers  have  organized 
the  Merchants'  Ore  Association  of  Cleveland,  which  adjusts 
their  relations  with  each  other  and  with  other  ore  producers, 
such  as  the  United  States  Steel  Corporation.  The  association 
attempts  to  establish  the  price  of  the  various  grades  of  iron  ore 
and  to  state  to  each  "  independent "  the  maximum  amount  of 
ore  that  it  may  produce.  The  price  must  be  satisfactory  to  the 

1  126  Fed.  Rep.  364.  2  ..5  peci_  Rep-  667< 

'•'•  Industrial  Commission  Report,  Vol.  XIII,  p.  474 :  "The  steel  rail  pools  were 
simple  price  agreements  between  the  managers  of  the  various  works,  to  sell  rails  at 
the  same  price  at  the  same  point. 

"  Q.  For  manufacturers  before  the  organization  of  the  United  States  Steel  Cor- 
poration were  similar  arrangements  existing  ? 

"./.  "\  es :  in  all  lines  of  business,  not  only  in  steel,  but  in  everything  else. 
I  here  were  similar  agreements,  known  as  joint  agreements,  to  maintain  prices. 
1  hey  have  existed  in  all  lines  uf  business  as  long  as  I  can  remember." 


INDUSTRIAL  POOLING  AGREEMENTS  77 

Steel  corporation.  The  Merchants'  Ore  Association  naturally 
desires  low  prices  to  enable  it  to  sell  the  largest  possible  amount 
of  product.  With  the  steel  makers  owning  ore  deposits,  the 
price  is  largely  a  matter  of  bookkeeping ;  but  the  endeavor  is, 
nevertheless,  to  keep  it  high,  in  order  to  raise  the  cost  of  pro- 
duction for  rival  steel  mills  not  owning  mines.  The  price  of 
Bessemer  ore  for  1903  was  $4.50  per  ton.1  For  1904  the  asso- 
ciation wished  it  to  be  between  $3.25  and  $3.80,  while  the  Steel 
corporation  demanded  that  $4  be  the  price,  threatening  to  sell 
ore  itself.  The  Ore  association  was,  however,  allowed  to  fix  it 
at  $3.50,  although  several  of  its  members  made  long-term  con- 
tracts to  deliver  at  a  sliding  scale  price,  fluctuating  with  the 
price  of  pig  iron.  This  made  it  impossible  for  the  association 
to  adjust  the  allotments  satisfactorily,  and  its  continued  exist- 
ence was  threatened.2 

Concerning  the  next  stage  of  manufacture  above  mining,  — 
namely,  of  pig  iron,  —  there  are  also  price  agreements  among 
the  furnace  men,  who  have  formed  the  Bessemer  Pig  Iron  Asso- 
ciation. A  pool  based  on  steel  ingot  production  was  attempted 
unsuccessfully.  Steel  billets,  however,  we  find  pooled  in  1896, 
and  again  since  1900.  The  heavier  materials  —  steel  rails,  beams, 
channels,  angles,  bars,  plates  of  all  kinds,  shafting  axles  and  rods, 
wire  and  wire  fencing  —  are  likewise  all  priced  by  pools.  Among 
the  lighter  forms  covered  by  such  agreements  are  chains,  nuts, 
bolts,  steel  hoops,  and  bands,  pipes  and  tubing,  and  hardware. 
A  prominent  retail  hardware  firm  stated  to  the  writer  that  the 
hardware  manufacturers  had  agreements  as  to  prices  covering 
practically  everything  in  the  store,  "all  shelf  hardware"  in  fact. 
Judging  from  the  iron  business,  we  may  expect  to  find  pooling 
agreements  developed  up  to  the  point  where  trade-marks,  style, 
or  individual  reputation,  become  predominant  considerations  in 
making  a  market  for  the  goods. 

Four  of  the  most  important  steel  products  —  billets,  rails, 
beams,  and  plates  —  have  been  specially  selected  in  this  study 
for  more  detailed  analysis  as  to  the  effect  of  pooling  upon  prices. 


78  TRUSTS,    POOLS  AND    CORPORATIONS 

The  appended  diagram  has  been  prepared  to  show  the  range  of 
prices  since  1890.  Only  a  very  brief  review  of  the  pools  that 
existed  during  these  years  can  be  given.  Were  a  detailed  history 
of  their  operations  available,  the  problem  presented  by  their 
existence  might  be  dealt  with  more  intelligently. 

The  first  billet  pool  was  formed  in  April,  1896,  as  an  attempt 
to  remedy  the  extreme  fluctuations  in  price  of  the  year  1895. 
The  Bessemer  Steel  Association,  as  it  was  called,  allowed  to  each 
firm  a  percentage  of  the  billet  business  of  the  country,  estimated 
at  4,500,000  Jtons,  and  imposed  a  fine  of  $2  per  ton  for  any  excess 
produced.  The  association  immediately  fixed  the  selling  price 
considerably  higher  than  demand  justified,  at  $21.50.  Outside 
firms  promptly  took  orders  at  $19.50;  and  there  was  also  much 
selling  contrary  to  the  agreement  by  insiders,  thereby  weakening 
the  pool  from  the  beginning.  Moreover,  it  was  possible  for  the 
larger  firms  to  avoid  the  fines  for  over-production  by  converting 
the  steel  billets  into  finished  shapes  before  selling.  The  pool 
was  so  very  ineffective  that  a  reorganization  followed  ;  but  even 
then  the  agreement  could  not  maintain  prices  against  a  demand 
refusing  to  accede  to  the  high  figure.  As  the  agreement  applied 
only  to  Bessemer  steel,  the  open  hearth  steel  production  was 
greatly  stimulated.  An  additional  open  hearth  capacity  of 
500,000  tons  and  a  score  of  new  outside  converters  helped 
break  up  the  pool.  The  guarantee  fund  of  85,000  failed  to  pre- 
vent its  collapse  in  December,  prices  falling  to  $15.  The  pool 
had  sacrificed  what  business  there  was,  and  had  brought  out  an 
array  of  new  competitors.1 

In  1899  the  price  of  billets  rose  wildly  from  $16  to  $38  per 
ton,  and  in  1900  fell  no  less  abruptly  to  Si 6.  The  billet  makers 
decided  that  they  must  attempt  another  agreement.2  A  base 
price  of  819.40  was  established,  which  was  easily  held,  as  prices 
began  to  rise.  But  the  sliding  scale  device  for  fixing  the  price 
of  billets  became  an  important  factor  in  1901,  the  price  being 

1  Iron  Age,  1 896,  Vol.  T,  p.  875,  gives  the  original  price  agreement  adopted; 
Vol.  II,  ]i.  223,  gives  the  difficulties  encountered  ;  Vol.  IT,  p.  96",  describes  the  billet 
market,  names  the  leading  producers,  and  the  chances  of  the  pool. 

-  Ibid.,  Jan.  3,  1901,  gives  a  summary  of  the  billet  business  of  1900,  and  conditions 
leading  to  the  pool  of  Nov.  8,  1900. 


INDUSTRIAL    POOLING    AGREEMENTS 


79 


PRICE  CHART  FOR   ROLLED  STI 


80  TRUSTS,   POOLS  AND   CORPORATIONS 

found  by  adding  the  cost  of  conversion  to  the  price  of  pig  iron. 
For  instance,  if  the  price  of  pig  iron  lies  between  $16  and  $17 
per  ton,  the  price  of  billets  is  found  by  adding  $6.50.  The 
larger  manufacturers  adopted  this  scale,  and  the  subsequent 
existence  of  the  billet  pool  has  been  nominal.  Price  agreements 
have  been  made,  and  hold  or  fail  as  the  demand  varies.  The 
nominal  price  of  $28,  agreed  upon  by  the  pool  in  July,  1903, 
was  reduced  to  $24  in  November,  and  then  to  $23. 1  The  de- 
scending lines  of  the  price  curve  since  1902  show  that  the  pool 
has  not  been  able  to  name  the  market  price,  It  seems  to  be 
shown  that  the  outside  billet  supply  is  always  very  elastic,  ren- 
dering the  billet  manufacture  essentially  competitive. 

The  rail  pool  shows  remarkable  strength,  having  named  prices 
for  sixteen  years,  \vith  the  exception  of  1897  and  1898.  This 
pool  was  formed  in  August,  i887.2  It  divided  the  estimated 
rail  demand  among  the  fifteen  members,  in  agreed  proportions. 
The  fixing  of  prices  was  not  part  of  the  written  contract,  but 
informal  agreements  were  entered  into.  A  penalty  of  $1.50  to 
$2.50  per  ton  for  all  excess  of  allotment  kept  the  firms  from 
cutting  prices  in  order  to  secure  more  business.  In  regard  to 
prices  during  the  existence  of  this  combination  the  Iron  Age 
remarks  :  "  The  price  that  was  asked  for  rails  by  the  mills  was 
decidedly  reasonable.  Manufacturers  whose  demand  varies 
ought  not  to  starve  the  mills  in  poor  times."  The  agreement 
came  to  an  end  in  1893,  but  was  renewed  after  a  sharp  fight. 
Increasing  difficulty  was  met  in  adjusting  the  allotments  during 
the  following  years.  Outside  concerns  had  to  be  bought  off  or 
subsidized  until,  in  1896,  $1,000,000  was  spent  in  this  way.  It 
had  been  estimated  that  the  demand  for  that  year  would  be 
about  2,200,000  tons,  but  it  was  actually  only  800,000  tons. 
Concerns  that  had  produced  little,  and  expected  heavy  bonuses, 
found  that  they  had  to  pay  a  penalty.  The  dissatisfaction  re- 

1  The  Joitrniil  of  Cinntiifrcr,  April  8,  190.},  reports  a  meeting  of  the  pool,  naming 
the  members.  The  present  agreement  includes  the  United  States  Steel  Corporation, 
Junes  \  Lnughlin's,  \Vherling  Steel  and  Iron  ( 'onipany,  Cambria  Steel  Company, 
Lackawanna  Steel  Company,  Pennsylvania  Steel  Company,  and  Maryland  Steel 
Company. 

-  /;-()//  Age  of  \uv.  16,  1893,  g'ves  f^1  details. 


INDUSTRIAL  POOLING  AGREEMENTS  81 

suited  in  secret  cutting  of  prices  and  the  breaking  up  of  the 
pool.1  There  was  immediate  talk  of  renewal ;  but  it  was  not 
attempted  until  prices  began  to  rise  in  1899,  when  the  present 
pool  was  formed.2  * 

The  contrast  between  the  billet  and  the  rail  price  curves  is 
very  striking.  The  former  is  irregular,  showing  constant  fluctu- 
ations ;  while  the  latter  is  made  up  of  long  horizontal  lines,  with 
abrupt  changes,  showing  that  the  effect  of  the  pool  was  to  steady 
prices  for  considerable  periods.  In  justice  to  the  rail  pool  it 
should  be  noted  that  in  1901  and  1902,  when  billets  rose  from 
$20  to  $32,  the  price  of  rails  remained  $28.  The  price  of  beams 
was  also  held,  but  the  plate  pool  raised  the  price  $4.  Agree- 
ments hold  well  in  the  rail  business,  because  it  is  confined  to  less 
than  a  dozen  firms,  and  is  comparatively  easy  to  control.3  Rails 
are  sold  direct  to  the  consumer ;  and,  moreover,  special  freight 
rates  may  have  helped  to  keep  up  the  market  price  of  this 
product. 

The  beam  pool  was  organized  soon  after  the  rail  pool  by  the 
mills  rolling  structural  steel  shapes,  such  as  I-beams  and  chan- 
nels. The  $70  figure  of  1890  was  a  pool  price,  maintained 
under  small  demand,  by  eleven  firms  producing  nine-tenths  of 
the  supply.  Foreign  beams  began  to  be  imported  in  1891  at 
$46;  and,  to  stop  this,  the  pool  agreed  to  lower  the  price  to  $56. 
But  the  Carnegie  company  had  just  finished  a  beam  mill  large 
enough  to  supply  the  whole  demand  of  the  country,  and  was 
not  satisfied  with  the  allotment  given  by  the  pool.  This  com- 
pany seems  to  have  been  constantly  on  the  alert,  when  pooling 

1  Iron  Age,  Fell.  II,  1897,  reviews  the  pool's  history. 

2  //'/</.,  Jan.  i,  1901,  describes  the  agreement  made. 

*  In  June,  1904,  an  international  pool  between  the  German  and  English  manu- 
facturers was  attempted.  It  is  too  early  to  determine  its  effect  upon  the  export  trade 
of  the  two  countries.  —  En. 

3  Iron  Age  of  Feb.  II,  1897,  gives  the  1897  allotment  thus: 

Carnegie         ......  53.50  per  cent. 

Laekawanna  ......  19.00 

Cambria  ......        8.25 

Bethlehem 8.25 

Maryland 2.75 

Pennsylvania  .....       8.25 


82  TRUSTS,    POOLS   AND    CORPORATIONS 

agreements  were  weakening,  to  gather  in  orders  at  lower  fig- 
ures. Prices  fell  $22  at  once.  Boston  merchants  had  a  stock 
of  2500  tons  of  imported  beams  left  on  their  hands  to  dispose  of 
at  a  loss,  and  many  manufacturers  suffered  heavily. 

An  agreement  made  in  1896  held  for  a  short  time,  but  was 
broken  in  the  attempt  to  keep  prices  stationary  in  a  declining 
market.  Even  when  the  rail  pool  broke,  the  beam  makers  do 
not  seem  to  have  realized  that  it  may  be  expedient  for  pools  to 
lower  prices  as  well  as  to  raise  them.  When  the  break  occurred, 
in  May,  1897,  the  price  of  beams  fell  $12  a  ton.1 

The  present  pool  was  formed  in  1898  by  six  leading  firms.2 
The  agreement  since  then  has  been  renewed  annually.  The 
price  has  been  kept  at  $1.60  per  hundred  pounds,  Pittsburg, 
since  1901.  Foreign  beams  came  in  during  1902-03  on  account 
of  the  overcrowding  of  our  mills,  being  able  to  command  a 
premium  by  quick  delivery.  The  steadiness  of  the  price  of 
steel  beams  during  1901-02,  as  shown  by  the  chart,  when  billets 
rose  rapidly,  is  in  marked  contrast  with  the  fluctuations  of  1899, 
when,  as  billet  prices  rose,  the  beam  makers  advanced  prices 
with  leaps  and  bounds.  This  change  of  policy  was  partly  due 
to  the  influence  of  the  Steel  corporation.  More  than  any  other 
steel  company  it  must  maintain  a  large  volume  of  business  with- 
out interruption  in  order  to  meet  heavy  charges.  The  price  of 
beams  in  this  case  was  already  sufficient  to  give  a  reasonable 
profit.  Moreover,  a  large  demand  indirectly  increased  the  cor- 
poration's profits  by  reason  of  its  ownership  of  other  subsidiary 
companies. 

The  plate  pool  is  a  recent  development,  having  existed  since 
1900  only.  The  line  on  the  diagram,  showing  the  course  of 
prices  of  steel  plates,  is  remarkable,  inasmuch  as  it  shows  a  far 
more  violent  fluctuation  during  1899-1900  than  in  the  case  of 
the  other  pooled  products  —  rails  and  beams.  In  February, 
1899,  the  price  of  plates  was  81.30  per  hundred  pounds  at  Pitts- 
burg.  Buyers  who  anticipated  high  prices  bought  until  in 


INDUSTRIAL    POOLING    AGREEMENTS  83 

August  the  price  had  reached  $3.  As  the  turning-point  was  seen, 
buyers,  becoming  frightened,  withdrew  ;  and  the  rolling  mills 
fought  to  secure  business,  until  a  price  of  95  cents  was  reached 
in  July,  1900.  This  ruinous  condition  was  the  cause  of  several 
meetings,  resulting  in  an  agreement  between  the  plate  mills  in 
October.  Orders  came  in  as  soon  as  the  stability  of  the  pool 
seemed  assured,  and  the  year  closed  with  400,000  tons  of  orders 
on  hand.  Prices  were  fixed  as  usual,  with  a  Pittsburg  base, 
freight  being  added  to  this  base  for  prices  at  other  points. 

An  enormous  demand  for  steel  plates  developed  during  1901- 
1902,  due  largely  to  the  steel  car  and  steel  ship  industries.  The 
price  was  raised  to  £1.60  in  April,  1901,  at  which  it  has  now 
stood  for  three  years.  The  growth  of  new  rivals  was  checked, 
and  the  maintenance  of  the  price  during  the  present  slackness 
was  made  easier,  by  the  policy  of  reasonable  prices  in  good 
times.  The  pool  prevented  buyers  from  competing  and  pushing 
up  prices  in  1901-02,  although  small  mills  at  one  time  secured 
65  cents  excess,  for  immediate  delivery.  This  excess  disap- 
peared in  July,  1903,  when  mills  began  to  close  down  for  lack 
of  orders.  The  old  price  was  renewed,  however,  in  December.1 
It  was  thought  that  the  small  demand  could  not  be  increased  by 
a  slight  reduction  in  price.  This,  however,  would  seem  to  be 
dangerous  reasoning,  judging  by  the  failures  of  other  pools 
under  similar  circumstances. 

General  conclusions  are  apt  to  be  misleading  on  a  subject 
such  as  this,  where  full  information  is  carefully  withheld  ;  but 
from  the  available  history  of  these  pools,  as  outlined,  certain 
facts  seem  to  be  fairly  well  established.  It  is  not  possible  by 
law  to  prevent  all  price  agreements,  nor  is  such  a  policy  de- 
sirable. For  in  such  an  event,  with  quick  transportation  at  low 
rates,  competitors  are  free  to  fight  each  other  until  the  more 
powerful  firms  drive  the  weaker  ones  to  the  wall.  The  victors 
are  then  free  to  recoup  their  losses  as  quickly  as  possible  at  the 
public  expense.  Both  very  low  prices  and  exceptionally  high 
ones  are  harmful  to  business  in  general,  and  to  the  public. 
The  manufacturers  would  seem  to  be  justified  in  making  some 

^  Journal  of  (.'omincrce,  I>ec.  19,  1903. 


84  TRUSTS,    POOLS   AND   CORPORATIONS 

agreement,  and  in  allowing  one  another  to  continue  to  share  in 
the  business  in  definite  proportions,  in  order  to  prevent  this  de- 
structive warfare. 

T\vo  remedial  policies  are  open  to  competitors  in  such  an 
event.  Either  an  industrial  combination  may  be  effected  ;  or 
refuge  may  be  sought  in  one  of  these  price  agreements  or 
pools.  The  railroads  were  driven  to  adopt  the  policy  of  buy- 
ing up  competitors,  —  a  policy  resulting,  for  a  time  at  least, 
in  embarrassments  and  receiverships.  They  have  found  it 
necessary  to  come  to  some  agreement  on  reasonable  and  equal 
rates.  The  industrial  companies,  following  them  some  years 
later,  have  attempted  gigantic  consolidations,  the  result  of 
which  is  at  present  doubtful.  Most  manufacturers  would  pre- 
fer to  own  their  own  plants,  making  whatever  arrangements 
were  necessary  for  continued  existence,  rather  than  to  lose 
their  identity  by  selling  to  a  corporation.  And  direct  manage- 
ment by  a  manufacturing  owner  may  be  expected  to  be  more 
efficient  than  management  by  distant  financiers  representing 
stockholders. 

The  second  remedy  for  ruinous  competition  lies  in  industrial 
pools,  such  as  were  constantly  formed,  broken  up,  and  re-formed, 
until  about  1900.  This  instability  seems  to  have  resulted  from 
the  fact  that  no  pool  or  price  agreement  can  continue  where  the 
price  has  not  been  fixed  at  a  reasonable  figure  ;  for  new  capital 
is  always  ready  to  seek  investment  where  profits  are  known  to 
be  ample.  However  widely  the  pool  may  extend,  it  cannot 
absorb  all  of  this  idle  capital.  Only  when  the  pool  price  is  too 
low  unduly  to  tempt  the  outsider  to  build  or  enlarge  his  plant  is 
its  position  at  all  secure.  Another  factor  of  note  is  that  pools 
are  always  most  favorable  to  the  outside  plants,  which  can  en- 
joy the  advantages  of  the  pool  price  without  feeling  the  restric- 
tions.1 

Inherent  weakness  breaks  up  many,  from  dissatisfaction  with 
the  allotment  and  the  constant  temptation  to  shade  the  price  or 


INDUSTRIAL   POOLING  AGREEMENTS  85 

to  conceal  sales.  The  pools  are  in  several  instances  being  sup- 
planted by  the  sliding  scale  adjustment  of  prices,  based  upon 
the  price  of  the  raw  material.  The  effect  of  the  temporary 
pools  is  thoroughly  bad.  Their  false  profits  lead  to  a  mis- 
directed investment  of  capital,  as  in  the  case  of  the  nail  pool, 
where  plants  sprang  up  during  high  prices,  so  that  two  months' 
full  operation  would  have  supplied  the  market  for  a  year.  The 
inevitable  price  variations  are  greatly  exaggerated,  because  pur- 
chasers refrain  from  buying  when  the  market  is  falling,  sending 
prices  to  the  very  bottom.  Mr.  Meade's  statement,  that  the 
prices  which  follow  the  dissolution  of  a  pool  are  lower  than 
those  that  brought  the  producers  together,1  has  been  fre- 
quently illustrated. 

These  powerful  associations  exist  without  supervision  of  any 
kind,  our  knowledge  of  them  being  gained  chiefly  as  they  fail. 
Although,  since  the  Trans-Missouri  Freight  Association,  and 
other  anti-combination  decisions,  all  such  arrangements  have 
been  carried  on  in  secret,  it  is  doubtful  if  their  scope  has  been 
appreciably  diminished.  During  the  last  four  years  they  seem 
to  be  on  the  increase,  as  a  matter  of  fact.  Having  been  denied 
recognition  by  law,  they  have  necessarily  devised  methods  of 
their  own,  to  preserve  their  agreement  by  fines  and  bribes.  Their 
existence  and  effectiveness  at  present  would  seem  to  indicate 
reasonable  prices  as  well  as  reasonable  use  of  their  inherent 
power  in  other  ways.  Experience  shows  that,  were  their  policy 
otherwise,  the  pool  would  be  in  danger  of  breaking  suddenly 
at  any  time.  In  any  event,  a  more  satisfactory  arrangement  is 
certainly  desirable.  In  Germany,  pooling  agreements  have  been 
made  enforceable  by  the  courts,  and  their  affairs  are  subject  to 
government  supervision.  The  evils  caused  by  pools  with  the 
"  get-rich-quick  motive  "  might,  perhaps,  in  the  United  States 
be  avoided  by  a  similar  legal  recognition  of  the  economic  justi- 
fication for  associations  among  independent  manufacturers,  with 
agreements  both  reasonable  and  enforceable. 

WALLACE  E.   BELCHER. 

1  Trust  Finance,  p.  28. 


V 

THE   ADDYSTON    PIPE   COMPANY1 

THE  relevant  facts  may  be  classified  under  the  following 
headings  :  first,  the  terms  of  the  trust  agreement;  second, 
its  purposes ;    third,  its    practical   construction    and  operation ; 
fourth,  its  effects  upon  the  public. 

i.    TERMS  OF  THE  AGREEMENT 
The  six  companies  are  located  as  follows  : 

Adrlyston  Co.  ......  Cincinnati,  Ohio. 

Dennis  Long  &  Co.          .....  Louisville,  Ky. 

South  I'iusburg  Co.          .....  South  1'ittsburg,  Tenn. 

Chattanooga  Co.     ......  Chattanooga,  Tenn. 

AnnisUm  Co Anniston,  Ala. 

Howard  Harrison  Co.      .....  Bessemer,  Ala. 

It  is  to  be  borne  in  mind  in  understanding  this  agreement  that 
the  greater  part  of  the  business  consists  in  taking  contracts  for 
municipal  corporations,  gas  or  water  companies,  and  other  large 
institutions  which  usually  invite  bids  from  various  competitors. 

The  earlier  agreement  of  December  28,  1894,  is  of  present 
importance  only  in  so  far  as  its  provisions  have  been  continued 
in  effect,  namely,  in  respect  to  the  "reserved  cities"  and  to  the 
extent  of  the  "  pay  territory."  The  main  agreement  was  pro- 
posed by  John  \V.  Harrison,  President  of  the  Howard  Harrison 
Co.,  on  May  16,  1895,  and  adopted  on  May  27,  1895,  in  the 
form  of  a  resolution  entered  upon  the  minutes  of  the  association. 
It  is  as  follows  (page  83): 

1  I'Vom  argument  of  Hon.  K.  B.  Whitney,  U.  S.  Assistant  Attorney-General,  in 
r.  .V.  v.  .-/,/,/r.;/,.//  rip:  ,iini  St,--l  (',->.,  I".  S.  Circuit  Court  <  f  Appeals,  Sixth  Circuit. 
Appeal  Case  No.  498.  J'age  references  run  to  the  testimony  in  the  official  court 
record. 

86 


THE   ADDYSTON    PIPE   COMPANY  87 

That  from  and  after  the  first  day  of  June  that  all  competition  on  the 
pipe  lettings  shall  take  place  among  the  various  pipe  shops  prior  to  the 
said  letting.  To  accomplish  this  purpose  it  is  proposed  that  the  six 
competitive  shops  have  a  "representative  board"  located  at  some 
central  city  to  whom  all  inquiries  for  pipe  shall  be  referred,  and  said 
board  shall  fix  the  price  at  which  said  pipe  shall  be  sold,  and  bids  taken 
from  the  respective  shops  for  the  privilege  of  handling  the  order,  and 
the  party  securing  the  order  shall  have  the  protection  of  all  the  other 
shops.  .  .  .  All  division  of  bonuses  to  remain  as  now  established 
during  the  year  1895. 

This  system  of  bidding  is  known  as  "  buying  a  job  "  (page  89). 

One  exception  to  the  general  rule  is  that  of  the  "  reserved 
cities"  which  remain  tacitly  under  the  resolution  of  December 
28,  1894,  as  follows  (pages  77-78): 

Third.  The  Addyston  Pipe  and  Steel  Company  shall  handle  the 
business  of  the  Gas  and  Water  companies  of  Cincinnati,  Ohio,  Covington 
and  Newport,  Ky.,  and  pay  the  bonus  hereafter  mentioned,  and  the 
balance  of  the  parties  to  this  agreement  shall  bid  on  such  work  such 
reasonable  prices  as  they  shall  dictate. 

Fourth.  Dennis  Long  and  Company  of  Louisville,  Ky.,  shall  handle 
Louisville,  Ky.,  Jeffersonville,  Ind.,  and  New  Albany,  Ind.,  furnishing  all 
the  pipe  for  (las  and  Water  works  in  above  named  cities. 

Fifth.  The  Anniston  Pipe  and  Foundry  Company  shall  handle  An- 
niston,  Ala.,  and  Atlanta,  Ga.,  furnishing  all  pipe  for  Gas  and  Water  com- 
panies in  above  named  cities. 

Sixth.  The  Chattanooga  Foundry  and  Pipe  Works  shall  handle 
Chattanooga,  Tenn.,  and  New  Orleans,  La.,  furnishing  all  gas  and  water 
pipe  in  the  above  named  cities. 

Seventh.  The  Howard  1  larrison  Iron  Company  shall  handle  Bes- 
semer and  Birmingham,  Ala.,  and  St.  Louis,  Mo.,  furnishing  all  pipe  for 
Gas  and  Water  companies  in  the  above  named  cities  ;  extra  bonus  to  be 
put  on  Fast  St.  Louis  and  Madison,  111.,  so  as  to  protect  the  prices 
named  for  St.  Louis,  Mo. 

Eighth.  South  Pittsburg  Pipe  Works  shall  handle  Omaha,  Neb.,  on 
all  sixes  required  by  that  city  during  the  year  of  1895,  conferring  with 
the  other  companies  and  cooperating  with  them  ;  thereafter  they  shall 
handle  the  Gas  and  Water  companies  of  Omaha,  Neb.,  on  such  sixes  as 
they  make. 


88  TRUSTS,   POOLS  AND    CORPORATIONS 

A  modification  was  made,  however,  on  December  19,  1895,  as 
follows  (page  84) : 

That  upon  all  inquiries  from  prices  from  "  reserved  cities  "  for  pipe  re- 
quired during  the  year  of  1896,  that  prices  and  bonus  shall  be  fixed  at 
a  regular  or  called  meeting  of  the  principals. 

Another  exception  recognized  was  that  of  "  special  cus- 
tomers "  of  the  different  concerns.  As  to  these  it  was  resolved 
on  May  27,  1895  (page  84): 

That  when  an  inquiry  is  reported  to  which  a  member  can  properly 
establish  a  claim  as  a  special  customer,  such  inquiry  should  not  be  dis- 
posed of  by  the  "  auction  basis,"  but  shall  be  handled  by  such  member, 
the  committee  fixing  the  price  and  bonus,  such  price  and  bonus  to  be 
commensurate  with  prices  and  bonuses  at  the  time  such  inquiry  shall  be 
reported. 

It  was  further  resolved  on  the  same  day  (page  84) : 

That  all  parties  to  this  association  having  quotations  out  shall  notify 
their  customers  that  the  same  will  be  withdrawn  by  June  i,  1895,  if  not 
previously  accepted,  and  upon  all  business  accepted  on  or  after  June 
ist,  bonuses  shall  be  fixed  by  the  committee. 

The  provisions  of  this  agreement  operated  only  in  what  was 
called  the  "pay  territory  "  or  "bonus  territory."  This  territory 
is  described  in  the  pleadings,  the  opinion  of  Judge  Clark,  and 
the  resolution  at  page  78  of  the  record.  It  includes  the  whole  of 
the  United  States  except  Virginia  and  the  States  north  and  east 
thereof,  and  except  the  Territory  of  Alaska. 

The  bonuses,  when  not  fixed  on  the  "  auction  basis,"  are  fixed 
by  a  schedule  shown  on  page  78,  by  such  modifications  as  have 
since  been  made  therein,  or  by  special  order  of  the  committee. 

To  carry  out  the  objects  of  the  association,  headquarters  were 
established  at  Cincinnati,  Ohio,  with  an  office  force  and  a  com- 
mittee of  representatives  from  the  various  shops  (pages  83-84). 
The  bonuses,  after  December  20,  1895,  were  divided  according 
to  a  schedule  based  on  the  following  estimated  tonnage  of  the 

o  o 

various  shops  (page  86): 


THE   ADDYSTON    PIPE    COMPANY  89 

Tons 

South  Pittsburg 15,000 

Anniston  ..........  30,000 

Chattanooga     ..........  40,000 

Bessemer  ..........  45,000 

Louisville          ..........  45,000 

Cincinnati         ..........  45,000 

The  bonuses  were  not  paid  upon  the  acceptance  of  the  bid 
or  even  upon  the  successful  closing  of  the  contract  with  the 
purchaser,  but  only  upon  the  actual  shipment  of  the  pipe. 
Thus  the  schedule  last  quoted  reads  as  follows  (page  86) : 

i st.  On  the  first  90,000  tons  of  pipe  shipped  into  "  pay  territory  "  16" 
and  smaller  sizes  shall  be  divided  among  the  six  shops  [etc.]. 

In  order  to  insure  the  proper  working  of  the  combination,  an 
auditor's  office  was  established  and  regular  reports  required. 
Thus  (pages  80-82): 

Thin/,  Sec.  ist.  Each  shop  shall  report  daily  to  the  auditor  all 
orders  secured  in  bonus  or  free  territory,  giving  the  shop  number  [etc.]. 

Sec.  2<1.  On  the  ist  and  i6th  of  each  month  they  shall  report  to  the 
auditor  all  shipments  made  in  all  territory,  giving  shop  number  [etc.]  ; 
showing  the  amount  of  bonus  and  tonnage,  of  the  bonus  as  well  as  free 
territory. 

Sec.  4th.  The  auditor  shall  make  carbon  copies  daily  of  all  reports 
received,  and  send  one  to  each  shop,  and  to  such  others  as  may  be 
designated. 


Sec.  3<1.  lie  shall  on  the  ist  and  i6th  of  each  month,  or  as  soon  as 
practicable,  send  to  each  shop  a  statement  of  all  shipments  reported  in 
the  previous  half  months,  with  a  balance  sheet  showing  the  total  amount 
of  the  premiums  on  xJiipnicnfs,  the  division  of  the  same,  and  a  debit 
credit  balance  of  each  company:  also  a  statement  of  free  orders  se- 
cured during  the  same  period  ;  and  a  memorandum  of  balance  payable 
from  one  to  another. 


Whoever  has  a  representative  at  any  public  letting  shall  instruct  him 
to  send  to  the  auditor  a  full  li.st  of  the  bids  and  bidders  on  same  ;  also 
that  all  information  in  regard  to  work  taken  in  pay  territory  by  the  shops 
outside  of  this  association  shall  be  reported  to  the  auditor,  \vho  shall 


QO  TRUSTS,   POOLS   AND   CORPORATIONS 

keep  a  proper  record  of  such  information  and  send  carbon  copies  of 
same  to  all  of  the  members  of  this  association. 

******** 
That  whenever  an  order  is  reported  by  any  shop,  and  a  doubt  exists 
as  to  the  proper  bonus  to  be  paid,  that  it  be  reported  with  the  facts  in 
the  case,  to  be  acted  upon  at  the  next  meeting  of  the  executive  com- 
mittee. 

The  combination  also  kept  a  "  black  list  "  for  some  boycotting 
purpose  not  explained  (page  90). 


2.    PURPOSES  OF  THE  AGREEMENT 

The  agreement  of  May  27,  1895,  contains  the  following  recital 
of  its  purpose  (pages  82-83): 

Whereas,  the  system  now  in  operation  in  this  association  of  having  a 
"  fixed  bonus  on  the  several  States  "  has  not  in  its  operation  resulted  in 
the  advancement  in  the  prices  of  pipe  as  was  anticipated,  except  in  "  re- 
sciTcd cities'''  and  some  further  action  is  imperatively  necessary  in  order 
to  accomplish  the  ends  for  which  this  association  was  formed :  There- 
fore [etc.] 

Mr.  Bowron  of  the  South  Pittsburg  company  says  that  the 
association  was  established  "to  maintain  fair  prices  and  a  just 
distribution  of  work"  —  "  to  maintain  fair  prices  and  secure  for 
each  a  fair  proportion  of  the  work  in  a  certain  territory,  by 
restraining  in  a  certain  measure  competition  as  among  them- 
selves only"  —"to  restrain  competition  as  among  defendants 
and  allow  to  each  a  profitable  division  of  wrork  according  to  its 
relative  capacity,  and  thereby  maintain  fair  prices  to  all  "(pages 
194-195). 

Mr.  C.  \Y.  Harrison  of  the  same  company  says  that  it  was 
"  on  the  theory  that  destructive  competition  results  in  monopoly," 
and  that  it  "  was  the  purpose  of  this  association  to  maintain  fair 
prices  and  secure  for  each  of  its  members  a  fair  proportion  of 
the  work  in  a  certain  territory  by  restraining  in  a  reasonable 
measure  competition  as  among  themselves  only"  (page  216). 

Mr.  Callahan  of  the  Louisville  company  says  that  it  was  "to 
maintain  fair  prices,  to  regulate  credits,  and  to  accomplish  an 


THE   ADDYSTON    PIPE   COMPANY  91 

equitable  distribution  of  such  orders  as  the  six  defendants  could 
secure  in  competition  with  the  other  manufacturers  of  cast  iron 
pipe"  —"by  regulating  to  a  certain  extent  the  competition 
among  the  defendants  only,  to  endeavor  to  maintain  fair  prices, 
and  to  secure  to  each  of  the  defendants  a  fair  proportion  of  the 
orders  in  a  certain  territory  "  (pages  263-264). 

In  describing  the  auction  system,  Mr.  Callahan  clearly  states 
what  "fair  prices  "  mean  as  understood  by  such  combinations: 
"  These  voluntary  offers  from  defendants  were  each  based  upon 
such  prices  for  the  respective  orders  as  these  defendants  con- 
sidered would  be  fair  and  reasonable  prices  "  (page  264). 

That  fairness  and  reasonableness  from  the  consumers'  point 
of  view  was  not  at  all  taken  into  consideration  is  shown  by  the 
prices  actually  charged  in  "  pay  territory  "  as  set  forth  in  the 
record,  and  by  a  letter  of  Mr.  Thomasson  of  the  Chattanooga 
company  (pages  102-103): 

We  believe  that  as  a  general  thing  we  have  had  our  prices  entirely  too 
high,  ami  especially  do  we  believe  this  has  been  the  case  as  to  prices  in 
"  reserved  cities."  The  prices  made  at  St.  Louis  and  Atlanta  are  entirely 
out  of  all  reason,  and  the  result  has  been  and  always  will  be,  when  high 
prices  are  named,  to  create  a  bad  feeling  and  an  agitation  against  the 
"Combination."  There  is  no  reason  why  Atlanta,  New  Orleans,  St. 
Louis,  or  Omaha  should  be  made  to  pay  higher  prices  for  their  pipe 
than  any  other  places  near  them  who  do  not  use  anything  like  the 
amount  of  pipe  and  whose  trade  is  not  as  desirable  for  many  other 
reasons. 

The  affidavits  of  defendants  show  ho\v  in  some  respects  this 
combination  works  beneficially  by  distributing  orders  in  such  a 
manner  that  a  greater  regularity  of  employment  is  obtained  at 
the  different  shops.  This  is  immaterial.  Probably  few  unlawful 
combinations  would  fail  to  secure  economy  of  service  to  some 
considerable  extent.  The  clement  of  evil  docs  not  fail  to  vitiate 
the  agreement  because  it  contains  likewise  an  element  of  good. 
A  most  interesting  letter  of  Mr.  Thomasson  (pages  110-112) 
shows  that  the  bonus  system  was  not  intended  to  work,  and  did 
not  actually  work,  simply  as  a  distributor  of  employment,  leaving 
the  price  charged  to  the  consumer  merely  the  actual  cost  with  a 
fair  business  profit.  While  some  proportion  of  the  bonus  may 


92  TRUSTS,  POOLS  AND   CORPORATIONS 

represent  economy  in  production,  a  part  of  it  is  shown  to  repre- 
sent an  extra  profit  divided  up  among  the  different  companies. 
Mr.  Thomasson  points  out  how  the  Bessemer  company  is  going 
too  far  in  speculating  on  this  extra  profit,  and  how  his  own  com- 
pany is  secretly  taking  advantage  of  this  error  of  its  associate 
(page  in): 

If  they  should  continue  to  buy  all  the  pipe  that  goes  up  to  such  figures 
as  they  have  paid  for  Jacksonville  and  other  points,  they  would  wreck 
their  shop  in  a  few  months.  However,  they  of  course  calculate  this 
bonus  will  be  returned  to  tJiein  on  work  taken  by  other  shops.  We  are 
very  much  pleased  with  the  bonus  that  has  been  paid,  and  we  only  hope 
they  will  keep  it  up  as  it  is  only  money  in  our  pockets.  .  .  .  We 
note  Mr.  Thornton's  report  of  average  premiums  from  June  i  to  Decem- 
ber that  the  average  was  $3.63.  The  average  bonuses  that  are  prevail- 
ing to-day  are  $7  to  $8.  We  cannot  expect  this  to  continue.  ...  If 
we  cannot  secure  business  in  "  pay  territory  "  at  paying  prices,  we  think 
we  will  be  able  to  dispose  of  our  output  in  "  free  territory,"  and  of  course 
make  some  profit  on  that.  At  the  prices  that  Howard  Harrison  people 
paid  for  Jacksonville,  Des  Plaines,  and  one  or  two  other  points,  they  are 
losing  from  $2.50  to  83  per  ton,  that  is,  provided  "bonuses"  would  not 
be  returned  to  them.  Therefore  when  business  goes  at  a  loss  we  are 
willing  that  the  other  shops  make  it.  ... 

P.S. —  Do  not  leave  this  letter  on  your  desk,  where  it  might  fall  into 
the  hands  of  others.  Make  a  memorandum  and  tear  the  letter  up. 
Above  all  tilings  make  a  confidant  of  no  one  in  business  matters. 

I  shall  comment  again  later  on  this  letter. 

3.    PRACTICAL  CONSTRUCTION  AND  OPERATION 

The  record  gives  some  interesting  information  about  the 
working  of  this  agreement  in  different  cities. 

CJiica^o.  —  At  a  meeting  of  the  associates  on  February  14, 
1896,  it  was  decided  that  an  order  of  the  Chicago  Gas  Company 
should  be  filled  at  822  and  $21.50  with  a  bonus  of  35  (page  88), 
and  (apparently  0:1  some  other  Chicago  advertisement,  page  89): 

On  motion  of  A.  F.  Callahan,  it  was  agreed  on  the  dates  of  the 
Chicago  letting  at  least  five  of  the  shops  should  be  represented  and  a 
majority  of  them  should  decide  what  bid  should  be  made.  The  job  to 
be  regularly  disposed  of  by  the  committee  before  the  letting. 


THE   ADDYSTON    PIPE   COMPANY  93 

The  presence  of  five  shops  at  the  letting  was  in  pursuance  of 
the  system  of  "protecting  bids,"  by  slightly  higher  false  bids  on 
the  part  of  the  companies  which  had  agreed  with  the  combina- 
tion not  genuinely  to  compete  for  the  order.  This  system  has 
been  consistently  maintained  by  the  associates.  Its  advantages 
for  purposes  of  concealment  are  obvious. 

Louisville.  —  The  record  of  December  28,  1895,  contains  the 
following  (page  85): 

F.  B.  Nichols  moved  that  Dennis  Long  &  Company  be  allowed  to 
close  contract  for  the  year  of  1896,  with  the  Louisville  Water  Company 
at  the  best  price  they  can  obtain  for  same,  and  after  securing  contract 
refer  the  same  to  the  meeting  of  the  principals  to  fix  bonus. 

Seconded  by  A.  F.  Callahan.     Carried. 

St.  Louis.  —  Mr.  Nichols  of  the  Bessemer  company  writes  to 
the  other  companies  on  January  24,  1896,  as  follows  (page  94): 

I  prefer  that  if  any  of  you  find  it  necessary  to  put  in  a  bid  without 
going  to  St.  Louis,  please  bid  not  less  than  $27.00  for  the  pipe,  and 
2\  cents  per  pound  for  the  specials.  I  would  also  like  to  know  as  to 
which  of  you  would  find  it  convenient  to  have  a  representative  at  the 
letting.  It  will  be  necessary  to  have  two  outside  bidders. 

St.  Louis  was  a  "  reserved  city  "  belonging  to  the  Bessemer 
company  (page  //),  and  paying  a  bonus  of  82  per  ton  (page  78). 
The  amount  shipped  from  April  I,  to  December  31,  1895,  was 
10,970  tons,  giving  a  bonus  of  about  $22,000  to  the  combination 
(pages  94-95). 

Ktw.v-'illc. — The  Knoxville  Woollen  mills  on  April  25,  1896, 
wrote  to  Chattanooga  and  Bessemer  for  quotations  of  cast  iron 
pipe  (page  62).  This  contract  seems  to  have  been  bid  in  by 
Chattanooga,  which  telegraphed  the  other  companies  on  April 
29:  "  \Ye  will  advance  price  Knoxville  Woollen  mills  dollar  and 
half  ;  please  protect  "  (page  96),  at  the  same  time  bidding  822  per 
ton  (page  63).  Bessemer  accordingly,  through  Mr.  Nichols,  bid 
822.24  per  ton  on  April  30,  with  the  hypocritical  comment, 
"Trusting  that  we  will  be  favored  with  your  order,  we  are  yours 
trulv"  (pages  63—64). 

OHKI/.'II.  — The  working  of  the  agreement  is  well  shown  by  the 
bidding  for  Omaha  on  December  20,  1895  (page  87): 


94  TRUSTS,    POOLS   AND    CORPORATIONS 

W.  L.  Davis  moved  to  sell  the  519  pieces  of  20"  pipe  for  Omaha, 
Neb.,  for  $23.40  delivered. 

Seconded  by  D.  R.  P.  Dimmick.     Carried. 

F.  B.  Nichols  moved  that  Anniston  participate  in  this  bonus  and  the 
job  be  sold  over  the  table. 

Seconded  by  W.  L.  Davis.     Carried. 

Pursuant  to  the  motion  the  519  pieces  of  20"  pipe  for  Omaha  was 
sold  to  Bessemer  at  a  premium  of  $8. 

The  water  companies  of  Omaha  belong  to  South  Pittsburg 
(page  77).  The  receiver  of  one  of  them  called  for  bids  in  April, 
1896,  under  competitive  circumstances  which  the  company's 
agent  evidently  thought  "will  make  him  some  trouble,  especially 
if  we  try  to  obtain  too  high  a  price"  (pages  120-121).  In  re- 
sponse to  a  call  upon  Chattanooga  for  "  protection  "  Mr.  Thomas- 
son  wrote  as  follows  on  April  28  (page  121): 

Please  advise  us  at  once  as  to  what  figure  we  shall  make  on  this  work. 
Please  do  not  ask  us  to  make  a  price  of  two  or  three  dollars  per  ton 
higher  than  yours,  but  give  us  a  reasonable  price  to  name. 

The  Pittsburg  company  responded  (page  122): 

We  request  that  you  please  quote  the  American  Water  Works  Com- 
pany of  Omaha  price  of  $24.80  per  ton  of  2000  pounds  f.  o.  b.  Omaha. 

Accordingly  Chattanooga  wrote  the  following  candid  letter  to 
the  Receiver  at  Omaha  (page  122): 

DEAR  SIR  :  Replying  to  your  favor  of  the  25th  instant,  we  propose  to 
furnish  cast  iron  pipe  as  per  specifications  for  $24.80  per  ton  two  thou- 
sand pounds,  and  will  furnish  special  castings  from  our  regular  patterns 
for  two  and  one-fourth  cents  per  pound,  all  delivered  on  board  cars 
Omaha,  Neb.  We  are  in  a  position  to  give  you  prompt  shipment  on 
this  pipe  and  trust  this  time  we  unll  he  favored  unth  your  order. 

Very  truly,  yours, 

CHATTA.  FDY.  &  PIPE  WORKS, 
By  ]•].  B.  THOMASSOX. 

Such  letters  may  afford  the  court  some  hint  as  to  the  amount 
of  weight  which  can  be  placed  upon  the  testimony  of  the  gentle- 
men who  manage  this  honest  combination. 

AtliDiia. — This  city  was  the  property  of  the  Anniston  com- 
pany (page  77),  which  paid  a  bonus  of  $2  per  ton  as  the  rent  of  the 


THE   ADDYSTON    FIFE    COM  FAN  Y  95 

property  (page  78),  until  it  was  provided  that  such  bonuses  should 
be  fixed  at  a  meeting  of  the  principals  (page  84).  On  February  1 5, 
1896,  the  Chattanooga  company  had  an  inquiry  from  the  Atlanta 
Water  Works  for  1500  feet  of  12"  pipe,  and  about  12,000  feet 
of  pipe  varying  from  6"  to  10"  with  a  lot  of  special  castings. 
The  company,  through  Mr.  Thomasson,  at  once  asked  Anniston 
"As  to  what  price  you  desire  us  to  protect  on  this  contract" 
(page  97).  Anniston  answered  through  Mr.  Dimmick  (page  97.) : 

Flease  protect  §24  on  approximately  375  tons  of  cast-iron  pipe  for  the 
city  of  Atlanta,  Ga.,  on  which  \ve  are  asked  to-day  for  prices.  We  have 
sent  a  man  over  to  Atlanta  and  will  get  as  much  more  as  possible. 

This  price  was  nearly  $10  per  ton  (less  cost  of  transportation) 
over  what  would  be  a  paying  profit  at  Chattanooga  (page  1 1 1). 
Chattanooga,  however,  bid  $24.50  per  ton  delivered  on  board 
cars  at  Atlanta,  adding  with  its  usual  ingenuousness  :  "  We  can 
give  you  a  prompt  delivery  on  above  pipe  and  would  be  pleased 
to  receive  your  order  "  (page  98).  A  lower  bid  had  been  received 
from  R.  1).  Wood  &  Co.,  of  Philadelphia,  but  all  bids  were 
rejected  by  the  Atlanta  people,  as  they  "were  extremely  high" 
(page  98).  The  bids  thus  rejected  give  a  good  example  of  the 
method  by  which  these  companies  "protected"  each  other,  and 
incidentally  led  the  consumer  to  suppose  the  prices  reasonable. 
They  were  :  Anniston,  $24;  Bessemer,  $24.25  ;  South  Pittsburg, 
$24.25;  Chattanooga,  $24.50  (page  53). 

Anniston  at  once  telegraphed  Chattanooga :  "  Stand  pat  on 
your  price  "  (page  99),  and  in  response  to  complaints  about  the 
high  price  replied :  "  \Ve  believe  we  made  a  mistake  in  trying  to 
get  $24  for  pipe  and  2\  cents  for  specials,  but  there  would  have 
been  no  difficulty  in  this  respect  had  we  not  run  up  against 
R.  I).  Wood  &  Co.'s  man  there  putting  in  his  bid  for  hydrants, 
and  he  also  put  in  a  bid  for  the  pipe  and  specials  at  the  last 
moment;"  that  "they  [the  Atlanta  authorities]  stated  it  was 
their  belief  that  the  four  southern  shops  have  an  arrangement  by 
which  Anniston  is  to  get  the  work  ;  in  other  words,  that  we  had 
a  combination  between  us,  and  if  they  can  find  it  out  positively, 
they  will  never  receive  a  bid  from  any  of  us  again  ;  "  and  recom- 
mended that  all  four  southern  shops  have  representatives  on  the 


96  TRUSTS,   POOLS  AND   CORPORATIONS 

ground  at  the  next  letting  on  March  4  (pages  99-100).  The  Annis- 
ton  company's  report  from  its  agent  at  Atlanta  is  given  in  full  at 
pages.ioo-ioi.  Besides  the  Philadelphia  man  he  met  Mr.  Torbett, 
Secretary  of  the  Water  board,  Mr.  Erwin,  one  of  the  Water 
Commissioners,  and  Colonel  Woodward,  Superintendent  of  the 
Water  Works.  He  told  the  city  council  that  "  the  ruling  market 
price"  would  be  about  $24,  and  got  a  favorable  resolution 
through  the  council  without  a  dissenting  vote.  The  Philadelphia 
man,  however,  at  the  last  moment  put  in  a  bid  of  323.  The 
threat  against  the  four  southern  shops  came  from  Mr.  Erwin, 
and  Colonel  Woodward  also  advised  the  rejection  of  all  bids.  The 
colonel's  advice  may  have  been  on  the  ground  that  "  he  promised 
me  when  there  last  he  would  give  us  another  chance  in  the  event 
we  were  not  the  lowest  bidders."  In  other  words,  he  knew  that 
the  Anniston  company  could  afford  to  furnish  the  pipe  at  a  lower 
price  than  what  they  were  passing  off  as  the  "  ruling  market 
price."  It  is  not  surprising  that  the  colonel  appears  as  an 
affiant  on  behalf  of  the  Anniston  company,  maintaining  that  its 
prices  were  "fair,  reasonable,  and  moderate"  (pages  200-202), 
though  perhaps  it  may  be  surprising  that  Mr.  Erwin  fell  in  line 
with  him  (page  202). 

Negotiations  were  opened  with  the  Philadelphia  concern  to  pre- 
vent its  appearance  at  the  second  bidding  (page  103).  On  April 
10  (page  59)  the  contract  was  made  with  the  Anniston  company  at 
522.75  for  the  year's  supply,  and  822  for  some  "special  ship- 
ments." Assuming  the  cost  with  a  fair  profit  at  Anniston  to  be 
substantially  the  same  as  at  Chattanooga,  and  assuming  the  freight 
from  Anniston  to  Atlanta  to  be  Si. 60  per  ton  (page  90),  this  made 
a  price  of  about  86.75  Per  ton  over  and  above  a  fair  and  reason- 
able profit.  This  seems  to  be  an  underestimate,  because  we 
find  the  following  entry  in  the  minutes  of  the  Associated  Pipe 
Works  for  March  13,  1896  (page  90): 

Moved  that  "bonus"  on  Anniston's  Atlanta  Water  Works  contract  be 
fixed  at  ^7.10,  provided  freight  is  Si. 60  a  ton.  Carried. 

Before  payment  was  made  by  the  Atlanta  Water  Works,  an 
investigation  was  had,  based  upon  charges  by  the  same  man 
whose  information  led  to  the  present  suit.  The  charges  were 


THE   ADDYSTON    PIPE   COMPANY  97 

referred  to  a  special  committee,  consisting  of  Messrs.  Erwin  and 
Torbett  and  one  Hass,  on  May  18,  1896  (page  203).  The  city's 
attorneys  had  advised  that  the  city  could  recover  in  a  suit  against 
the  Anniston  Works  (pages  207-2 10).  The  committee,  however, 
unanimously  overruled  the  attorneys  after  hearing  the  officers  of 
the  Anniston  company  (pages  203-210). 

4.    THE  EFFECTS  UPON  THE  PUBLIC 

It  is  not  essential  to  show  deleterious  effects  upon  the  public, 
but  the  subject  is  an  interesting  one,  and  the  gleams  of  light 
from  this  record  are  also  interesting. 

The  defendants  have  repeated  ad  nauseam  affidavits  tend- 
ing to  show  that  there  were  other  large  works  —  larger  perhaps 
than  their  own  —  in  the  United  States.  A  tonnage  statement, 
for  instance,  is  given  (by  an  interested  witness  and  annexed  to 
an  evasive  affidavit)  of  factories  through  the  country,  including 
some  very  large  ones  in  Pennsylvania  and  New  Jersey  (page  270). 

It  also  appears,  however,  that  the  rates  of  freight  are  very 
high.  For  instance,  pipe  which  is  worth  from  Si 3  to  $14.75  at 
the  shop  in  Chattanooga  (page  ill)  pays  $6  to  Peabocly,  Mass., 
and  $5.55  to  Lockhaven,  Pa.  (page  104);  $5.60  to  Clifton,  N.  Y. 
(page  105),  $4.80  to  Wytheville,  Va.,  85.40  to  Troy,  X.  Y.,  $3.90 
to  Allegheny,  Pa.,  and  $4.95  to  Syracuse,  X.  Y.  (page  106).  The 
effect  of  these  high  rates,  together  with  the  location  of  these 
factories  on  or  near  the  west  slope  of  the  Appalachian  moun- 
tain range,  gives  to  them  (and  to  the  few  other  western  works) 
a  practical  monopoly  of  nearly  all  the  "  pay  territory  " — in  other 
words,  of  everything  but  the  Northern  and  the  Middle  states. 
To  this  general  statement  there  must  be,  of  course,  an  exception 
as  to  localities  on  the  coast  line  and  elsewhere  within  the  "pay 
territory"  that  are  within  the  reach  of  northeastern  factories. 
The  small  importance  of  these  exceptions,  however,  may  be 
gathered  from  the  affidavits  submitted  by  defendants  themselves. 
They  have  undertaken  to  show  the  actual  origin  of  the  pipe  used 
in  large  portions  of  the  "  pay  territory,"  and  have  only  succeeded 
in  identifying  the  great  Pennsylvania  and  Xew  Jersey  factories 
with  two  small  lots  of  unspecified  amount  (pages  213,271).  They 


98  TRUSTS,   POOLS  AND   CORPORATIONS 

content  themselves  with  such  evasive  statements  as  those  of  Mr. 
Callahan  at  page  265  of  the  record,  specifying  neither  the  size  of 
the  orders  nor  the  portions  of  the  "pay  territory"  where  they 
are  found. 

It  is  clear  that  as  to  the  bulk  of  the  "pay  territory  "  —  that  is, 
as  to  the  bulk  of  the  United  States  —  their  competition  comes 
from  but  few  rivals.  In  main  it  seems  to  be  confined  to  the 
works  at  Cleveland,  Columbus,  and  Newcomerstown,  Ohio,  and 
Detroit,  Mich.,  whose  capacity  is  200,  100,  75,  and  75  tons  per 
day,  respectively  (pages  197,  250,  181,  188).  A  concern  is  indeed 
mentioned  as  competing  at  St.  Louis,  but  it  is  suspected  to  be 
identical  with  the  Bessemer  concern  (pages  61-62),  with  which  it  is 
almost  identical  in  name.  The  factories  in  Colorado  and  Oregon 
are  small  and  seem  to  cut  only  a  local  figure.  The  same  may  be 
said  of  the  Texas  penitentiary. 

Such  information  as  is  given  us  leads  to  the  conclusion  that 
the  Ohio  and  Michigan  concerns  have  the  smaller  end  of  the 
business,  even  in  territory  for  which  transportation  rates  permit 
them  to  compete.  Mr.  Hallett,  a  general  contractor  in  Aurora, 
111.,  gives  the  precise  figures  for  his  purchases  in  1895  and  1896. 
He  purchased  514  tons  from  the  combination,  25  tons  from  the 
Newcomerstown  concern  (J.  B.  Clow  &  Son),  and  50  tons  from 
jobbers  (pages  123-124).  Mr.  W.  H.  Garrett,  of  Batavia,  III, 
gives  the  purchases  of  the  Water  Works  Department  of  Fair- 
banks, Morse  &  Co.  for  the  same  period.  They  included  1023 
tons  from  the  combination,  690  tons  from  Columbus,  79  tons 
from  Cleveland,  and  35  tons  from  the  Glamorgan  Pipe  and 
Foundry  Co.  of  Lynchburg,  Va.  These  purchases  were  "in  the 
business  of  contracting  water  works  for  municipalities  tJirougkout 
the  United  States"  (pages  129-130). 

We  could  judge  more  accurately  of  the  strength  of  the  Asso- 
ciated Pipe  \Vorks  if  we  were  definitely  informed  as  to  their 
capacity  per  diem.  They  have  been  so  careful  to  produce  testi- 
mony as  to  the  per diem  capacity  of  other  companies  (pages  178— 
179,  180-181,  187-189,  196-198,  198-200,  249-250)  that  we  may 
infer  that  there  was  good  reason  for  their  failing  to  be  specific  as  to 
theirown.  The  only  specific  testimony  bearing  on  the  point  is  that 
of  Mr.  Llewellyn  as  to  his  Chattanooga  company.  He  gives  its 


THE   ADDYSTON    PIPE    COMPANY  99 

capacity  at  "  about  40,000  tons  of  cast  iron  pipe  and  special  cast- 
ings annually  "(page  243).  This  figure,  however,  is  evidently  taken 
from  the  minutes  of  the  combination  at  page  86,  which  is  shown 
by  Mr.  Thomasson  of  his  own  company  not  to  represent  the  actual 
capacity  of  the  various  works,  but  their  usual  output  (page  1 1 1). 
The  40,000  tons  ascribed  to  Chattanooga  represent  its  proportion 
of  the  220,000  which  are  assumed,  not  as  the  full  capacity  of  the 
works,  but  as  their  probable  annual  shipments  into  pay  territory. 
The  total  of  these  shipments  is  estimated  at  220,000  for  the  six 
companies,  but  Mr.  Thomasson  says : 

We  think  a  very  conservative  estimate  of  shipments  into  this  territory 
will  amount  to  fully  200,000  this  year  ;  more  than  that  —  probably  over- 
run 240,000  tons. 

The  same  estimate  which  gives  Chattanooga  40,000  gives 
South  Pittsburg  and  Anniston  45,000  combined  (page  86);  but 
the  officers  of  these  companies  join  with  Mr.  Llewellyn  himself 
in  verifying  the  answer  (pages  43-44),  which  contains  the  follow- 
ing statement  as  to  the  "pay  territory"  (page  36): 

They,  however,  deny  that  the  shipments  of  pipe  for  1896  amount  to 
more  than  100,000  tons  in  said  territory,  which  they  aver  could  have 
been  supplied  by  any  two  of  defendants  so  as  to  deprive  all  others  of  any 
share  thereof. 

In  ascertaining  the  actual  capacity  we  may  therefore  pretty 
safely  double  the  estimate  at  page  86,  and  assume  it  to  be  440,000 
tons  a  year,  or  nearly  1,500  tons  per  day,  as  against  the  450  tons 
per  day  of  their  four  principal  rivals. 

As  confirmatory  of  the  position  that  no  reliance  is  to  be  placed 
upon  the  statements  of  these  defendants  as  to  the  relative  work- 
ing capacity  of  the  different  shops  (except  when  their  statements 
are  not  made  for  use  in  the  present  suit),  we  may  compare  the 
answer  which  they  all  join  in  verifying  with  the  testimony  of 
their  own  witnesses  concerning  the  capacity  of  other  works. 
Thus,  the  answer  states  the  capacity  of  Scottdale  as  200  tons 
instead  of  TOO;  of  Columbus  as  150  tons  instead  of  100;  and  of 
Detroit  as  100  tons  instead  of  75  (pages  44,  1/9,  188,  250). 

Another  example  of  the  misleading  character  of  this  testimony 
is  in  the  statement  of  Mr.  Callahan  at  page  265  as  to  the  actual 


100  TRUSTS,    POOLS  AND   CORPORATIONS 

clearance  settlements  amounting  in  1895  to  only  38  cents  per 
ton,  when  compared  with  Mr.  Thomasson's  letter  of  January 
2,  1896,  showing  that  the  average  premiums  from  June  I  to 
December  31,  1895,  were  $3.63  (page  in). 

Besides  the  partial  monopoly  which  they  were  enabled  to 
maintain  through  the  high  transportation  rates  and  the  limited 
output  of  their  western  rivals,  they  doubtless  resorted  to  special 
means  for  diverting  rivalry,  such  as  the  negotiation  for  the  with- 
drawal of  the  Philadelphia  company  from  competition  at  Atlanta 
(page  103),  and  the  plan  to  prevent  one  Drummond  "  from  invad- 
ing our  western  territory"  (page  113). 

Reasonableness  of  prices.  —  It  will  ue  borne  in  mind  that,  even 
under  the  common  law  doctrine  permitting  reasonable  restraints 
of  trade,  the  burden  of  proof  as  to  reasonableness  is  on  the 
defendant. 

"  Wherever  such  contract  stat  indifferentcr,  and,  for  aught 
appears,  may  be  either  good  or  bad,  the  law  presumes  it  prinia 
facie  to  be  bad"  (Lord  Macclesfield  in  Jllifc/iel  v.  Reynolds, 
supra,  at  page  /oi).  "  In  all  restraints  of  trade,  where  nothing 
more  appears,  the  law  presumes  them  bad"  (id.,  at  page  704). 
"  The  general  rule  is  that  all  restraints  of  trade  which  the  law  so 
much  favors,  if  nothing  more  appear,  are  bad"  (Willes,  C.  J., 
in  Master  of  Gnnmakcrs  v.  Fell,  Willes,  388).  "Contracts  in 
restraint  of  trade  are  in  themselves,  if  nothing  more  appears  to 
shew  them  reasonable,  bad  in  the  eye  of  the  law"  (Tindal,  C.  J., 
in  Homer  v.  Graces,  7  Bing.,  735,  744;  S.  P.  Patterson  on 
"  Contracts  in  Restraint  of  Trade,"  page  5  ;  Pierce  v.  Fuller,  8 
Mass.,  223  ;  Chappcll  v.  Brocki^ay,  21  Wend.,  157,  159;  Addison 
on  "Contracts,"  page  1154). 

We  have  in  this  re'cord,  however,  affirmative  evidence  of  the 
unreasonableness  of  the  profits  obtained  by  these  corporations. 
Their  unreasonableness  is  shown  in  various  ways,  such  as  by  add- 
ing the  price  at  the  factory  (page  1 1 1 )  to  the  transportation  rate 
(page  90),  and  comparing  this  with  the  prices  actually  obtained, 
which  usually  range  from  about  822  to  825  per  ton.  It  is  also 
shown  by  the  actual  bonuses  paid  to  the  combination  for  the  privi- 
lege of  getting  a  contract,  these  bonuses  running  up  to  such  figures 


THE   ADDYSTON    PIPE   COMPANY  101 

as  $7.10  (page  90),  $7.50  (page  88),  and  $8.00  (page  87)  —  aver- 
aging from  $7.00  to  $8.00  in  January,  1896  (page  1 1 1 ).  It  is  also 
shown  by  the  large  amounts  of  the  aggregate  bonuses  which 
were  divided  up  among  these  companies  (pages  1 16-1 17).  It  is 
confirmed  by  the  statement  of  the  Chattanooga  company  itself 
that  the  prices  were  "entirely  too  high,"  especially  in  the  "re- 
served cities"  ;  that  "the  prices  made  at  St.  Louis  and  Atlanta 
are  entirely  out  of  all  reason  ;"  and  that  "  there  is  no  reason  why 
Atlanta,  New  Orleans,  St.  Louis,  or  Omaha  should  be  made  to 
pay  a  higher  price  for  their  pipe  than  other  places  near  them  " 
(page  103).  No  objection  was  made  to  this  statement  on  the 
score  of  competency ;  nor  can  its  competency  be  doubted  (  Wiborg 
v.  United  States,  163  U.  S.  at  pages  657-658). 

By  unduly  and  vastly  raising  the  normal  price  of  cast  iron 
pipe  among  communities  which,  by  their  geographical  position, 
should  have  enjoyed  special  advantages,  the  combination  has 
the  indirect  result  of  increasing  competition  in  the  northeastern 
or  "  free  territory."  This  is  shown  by  Thomasson's  letter  (pages 
1 10-1 12),  stating  the  policy  of  the  Chattanooga  company  in  view 
of  the  high  bonusus  paid  by  the  Bessemer  company  for  southern 
contracts.  He  figures  out  an  advantage  to  the  Chattanooga 
company  in  refraining  from  bids  and  taking  its  share  of  the 
bonus  without  contributing  to  the  fund,  and  adds  : 

If  we  cannot  secure  business  in  "  pay  territory  "  at  paying  prices,  we 
think  we  will  be  able  to  dispose  of  our  output  in  "free  territory"  and 
of  course  make  some  profit  on  that. 

Si 3.00  to  £14.75  per  ton  is  stated  in  the  same  letter  to  be  a 
profitable  figure,  and  the  Chattanooga  company's  propositions  to 
northeastern  cities  after  this  letter  (pages  104-107)  show  how  the 
theory  is  carried  into  practice  by  giving  those  cities  an  advan- 
tage of  several  dollars  per  ton  in  price  over  the  naturally  better 
situated  cities  immediately  adjacent  to  the  works  of  these 
defendants.  Mr.  Llewellyn  of  Chattanooga,  the  chairman  of  the 
combination  and  one  of  its  principal  witnesses,  was  thus  secretly 
inimical  to  its  interests. 

The  letter  announcing  this  scheme  is  dated  January  2,  1896. 
We  are  furnished  with  the  balance  sheet  showing  payments  and 


102  TRUSTS,   POOLS   AND   CORPORATIONS 

divisions  of  bonus  for  the  ensuing  four  and  a  half  months 
(page  117).  We  find  that  Chattanooga  during  those  months  paid 
in  $2016.25,  and  drew  out  $15,077.99  —  truly  a  vindication  of 
the  wisdom,  if  not  of  the  candidness,  of  this  valuable  witness. 

Cast  iron  pipe,  if  we  may  believe  Mr.  Harrison  of  South 
Pittsburg,  "  has  no  market  value  "  (page  214).  "  On  account  of 
the  manner  in  which  these  contracts  are  let,  the  customer  pre- 
vented the  establishment  of  any  market  price  "  (page  216).  We 
are  therefore  without  any  standard  of  reasonableness  derivable 
from  market  quotations.  The  evidence,  however,  is  overwhelm- 
ing that  in  large  portions  of  the  country  the  price  is  half  as 
much  again  what  it  ought  to  be. 

There  is,  indeed,  a  large  collection  of  affidavits  stating  that 
these  prices  are  reasonable  in  the  opinion  of  the  affiants.  Some 
of  the  affidavits  are  by  interested  parties,  more  or  less  discredited 
as  above  shown.  Most  of  the  rest  are  by  persons  who  have  no 
real  expert  knowledge.  It  will  be  remembered  that  cast  iron 
pipe,  on  account  of  the  peculiarities  of  its  use,  and  on  account 
of  the  high  transportation  rates,  has  no  general  market  price 
throughout  the  country.  Each  local  witness  knows  only  that 
the  combination  gives  him  as  low  prices  as  any  one  else,  knowing 
nothing  of  the  conditions  governing  the  price  as  it  would  be  if 
the  combination  should  dissolve. 

Moreover  the  opinions  are  not  accompanied  by  facts  to  back 
them,  further  than  the  single  fact  that  the  combination  is  able 
to  underbid  its  competitors  in  certain  localities.  Such  unsup- 
ported opinions  have  no  weight  under  the  rules  governing 
expert  evidence,  as  set  forth  in  The  Conqueror,  166  U.  S.  no, 
130-134,  and  cases  cited. 

CONCLUSION 

Enough  certainly  has  been  said  to  show  that  this  secret  and 
hypocritical  combination  is  in  violation  of  the  anti-trust  law. 

If  necessary,  it  could  easily  be  established  that  it  is  unlawful 
also  at  common  law,  so  that  the  only  question  that  the  Attorney 
General  would  have  had  to  consider,  had  the  anti-trust  law  never 
been  enacted,  would  have  been  whether  the  injury  to  the  public 


THE   ADDYSTON    PIPE    COMPANY  103 

was  sufficient  to  justify  his  filing  a  bill  upon  general  principles 
of  equity,  as  in  the  Debs  case. 

These  water  pipes  and  gas  pipes  belong  to  the  class  of  arti 
cles,  monopolies  in  which  are  especially  disfavored  by  the  law. 
(Gamewell  Fire  Alarm  Co.  v.  Crane,  160  Mass.,  50,  57.)  Every 
combination  tending  to  prevent  competition  for  public  contracts 
is  absolutely  void.  (Atcheson  v.  Mallon,  43  N.  Y.,  147  ;  Wlialcn  v. 
Brennan,  34  Neb.,  129,  153.)  Combinations  to  divide  up  terri- 
tory, and  thereby  maintain  rates  free  from  influence  of  compe- 
tition, are  void  per  sc  at  common  law,  and  their  validity  does 
not  depend  upon  the  result  of  any  inquiry  as  to  the  percentage 
of  profits  actually  obtained.  {Hooker  v.  Vandevvater,  4  Denio, 
349;  Stanton  v.  Allen,  5  Denio,  434;  Salt  Co.  v.  GutJirie,  35 
Oh.  St.,  672  ;  Craft  v.  McConnoughy,  79  111.,  346  ;  Vulcan  Powder 
Co.  v.  Hercules  Powder  Co.,  96  Cal,  510;  Hoffman  v.  Waters, 
ii  Weekly  Law  Bulletin,  358;  J\Iore  v.  Bennett,  140  111.,  69; 
Bis/top  v.  American  Preservers'  Co.,  157  111.,  284;  Nestcr  v. 
Continental  Brewing  Co.,  161  Pa.  St.,  473  ;  Oliver  v.  Gilmorc, 
52  Fed.  Rep.,  562  ;  Anderson  v.  Jett,  89  Ky.,  375  ;  Urmston  v. 
Whitlegge,  63  L.  T.  N.  S.,  455;  Chapin  v.  Brown,  83  la.,  156; 
Emery  v.  Ohio  Candle  Co.,  47  Oh.  St.,  320;  Pacific  Factor  Co.  v. 
Adlcr,  90  Cal.,  110;  see  also  Hilton  v.  Eckersley,  6  E.  and  B., 
47;  Ford  v.  CJiicago  Milk  SJiippcrs1  Association,  155  111.,  166  ; 
Railway  Co.  v.  Railway  Co.,  61  Eed.  Rep.,  993;  Pittsburg  Car- 
bon Co.  v.  McMillan,  119  N.  Y.,  46;  Santa  Clara  Co.  v.  Hayes, 
76  Cal.,  387-) 

Milwaukee  Masons'  and  Builders'  Asso.  v.  Niczcrowski,  70 
X.  W.  Rep.,  1 66,  was  decided  by  the  supreme  court  of  Wisconsin 
on  February  2,  1897.  Sixty  out  of  seventy  or  seventy-five 
mason  contractors  of  Milwaukee  made  an  association,  paying 
into  its  treasury  six  per  cent  on  all  contracts  taken  by  them, 
first  submitting  all  bids  for  work  to  the  association  and  raising 
the  lowest  bid  six  per  cent  before  submitting  it  to  the  owner  or 
architect.  This  was  held  an  unlawful  restraint  of  trade  at 
common  law,  without  the  aid  of  any  statute. 

In  the  famous  case  of  People  v.  XortJi  River  Sugar  Refilling 
Co.,  54  Hun,  354,  Judge  Charles  P.  Daly,  the  distinguished 
counsel  for  the  sugar  trust,  conceded  "  that  combinations  are 


104  TRUSTS,   POOLS  AND   CORPORATIONS 

unlawful  the  design  and  effect  of  which  necessarily  is  ... 
to  regulate  and  control  the  price  of  a  commodity  " ;  and  Judge 
Barrett,  referring  to  this  concession,  said  that  "  all  the  cases, 
ancient  and  modern,  agree  that  a  combination,  the  tendency  of 
which  is  to  prevent  competition  and  to  control  prices,  is  detri- 
mental to  the  public,  and  consequently  unlawful"  (page  370, 
note). 

It  is  therefore  respectfully  submitted  that  this  judgment 
should  be  reversed,  and  a  decree  entered  in  favor  of  the 
plaintiff. 

EDWARD  B.  WHITNEY, 
Assistant  A ttorney-  General. 


VI 

THE  CAPITALIZATION   OF  THE   INTERNATIONAL 
MERCANTILE    MARINE   COMPANY1 

THE  International  Mercantile  Marine  Company  completed, 
on  December  31,  1903,  its  first  year  of  life  as  a  going 
concern.  Up  to  the  date  of  this  writing,  if  stock  quotations  are 
any  indication  of  its  financial  condition,  the  success  of  the  com- 
pany, from  a  market  standpoint,  is  problematical.  Its  preferred 
stock  is  quoted  at  18  and  its  common  stock  at  5,  prices  which 
indicate  a  general  conviction  that  the  equity  in  the  company  is 
worth  little. 

There  is,  however,  a  possibility  that  the  stock  market  may  be 
mistaken  in  its  estimate  of  Mercantile  Marine.  In  a  declining 
market,  stock  values  are  influenced  more  strongly  by  the  financial 
necessities  of  holders  than  by  the  earning  power  of  the  companies 
whose  ownership  they  represent.  This  is  especially  true  of  the 
stocks  of  corporations  launched  on  a  declining  market  where  the 
influence  of  every  adverse  factor  is  exaggerated.  International 
Mercantile  Marine  has,  in  this  respect,  been  peculiarly  unfor- 
tunate. It  was  brought  out  during  the  fall  of  1902,  when  the 
decline  in  the  market  was  in  full  swing,  and  after  the  public  buy- 
ing power  had  been  exhausted.  Under  the  circumstances,  these 
securities  had  no  chance  of  a  favorable  reception.  Moreover, 
almost  from  the  start  they  were  subject  to  inside  pressure.  The 
English  vendors,  stimulated  by  some  natural  distrust  of  the 
unknown  economies  of  combination,  and  strenuously  exhorted 
thereto  by  the  financial  press  of  Great  Britain,  which  has  been 

1  From  the  l\-litical  .SV/V//<-t'  Quarterly,  Vol.  XIX,  1904,  pp.  50-65.  Compare 
also  the  same  author  on  Capitalisation  of  the  I'nited  States  Steel  Corporation  in  the 
Quarterly  [ourual  /'/'  /•-I'oiioiniis,  Vol.  XVI.  10.02,  pp.  214-232  ;  afterward  reprinted 
in  his  able  Trust  Finance. 

105 


106  TRUSTS,   POOLS  AND   CORPORATIONS 

from  the  outset  hostile  to  the  combination,1  sold  the  stock  which 
they  received  in  payment  for  their  interest,  and  the  members  of 
the  American  underwriting  syndicate,  as  well  as  the  American 
vendors,  hard  pressed  by  the  continued  stringency  in  the  money 
market,  have  contributed  to  the  selling  pressure. 

The  proposition  should  be  considered  on  its  merits,  without 
special  reference  to  the  market  price  of  the  company's  securities. 

The  outstanding  capital  of  the  Mercantile  Marine  Company 
is  divided  as  follows  : 

Underlying  bonds $16,000,000 

2O-year  collateral  debenture  bonds  (4^  per  cent)  .          .         .  52,000,000 

Preferred  stock,  cumulative  (6  per  cent)        ....  54,600,000 

Common  stock 48,000,000 

Total $170,600,000 

To  pay  interest  and  preferred  dividends  —  common  dividends, 
at  least  for  some  years  to  come,  are  hardly  to  be  expected  — 
will  require  the  following  amounts  : 

Interest  on  underlying  bonds,  taken  at  5  per  cent  .          .         .  $    800,000 

Interest  on  debentures     ........  2,340,000 

Dividends  on  preferred  stock           ......  3,276,000 

Total 56,416,000 

Following  the  practice  of  the  older  German  and  English  com- 
panies and  allowing  60  per  cent  of  net  earnings  for  depreciation, 
insurance,  and  renewals,  the  total  requirements,  letting  these 
funds  include  the  sinking  fund,  are  $i 6,000,000. 2 

1  P'or  example,  the  ftconowist  on  Xov.  29,  1902,  referring  to  the  report  that  cer- 
tain English  vendors  had  expressed  a  desire  to  receive  bonds  in  lieu  of  cash,  re- 
marked as  follows  :  "They  ([.  S.  Morgan  and  Co.)  also  state  that  the  offer  was  made 
on  the  expressed  desire  of  some  shareholders,  who  wished  to  invest  in  the  bonds. 
If  that  be  the  case,  it  seems  to  imply  a  singular  lack  of  business  capacity  on  the  part 
of  the  vendor  shareholders,  since  they  need  not  seek  far  to  find  securities  with  a  much 
greater  margin  of  security  than  these  bonds  to  return  a  higher  rate  of  interest.  All 
they  do  know  is  that  its  capitalization  will  be  enormously  in  excess  of  that  of  the 
undertakings  that  have  been  absorbed  in  it,  and  none  should  be  better  aware  than 
themselves  of  the  difficulty  that  will  be  met  with  in  earning  dividends  on  such  a  large 
sum,  since  they  have  had  the  experience  of  the  same  difficulty  with  a  much  smaller 
capitalization." 

-  The  bonds  of  the  International  Navigation  Company,  of  which  Si  "5,68(1.000  are- 
outstanding,  call  for  a  sinking  fund  of  S2;p,ooo  to  S 500,000  annually,  beginning 
May  I,  1905,  which  will  retire  the  bonds  at  maturity  in  1929.  No  sinking  fund  is 


THE    MERCANTILE    MARINE    COMPANY 


107 


Shortly  after  the  Mercantile  Marine  Company  was  organized, 
the  statement  was  made,  unofficially,  but  apparently  on  good 
authority,  by  the  Wall  Street  Journal,  that  the  average  net  earn- 
ings of  the  different  fleets  for  four  years  were  $6,107,675.  The 
same  authority  stated  that  the  estimated  savings  in  the  cost  of 
operation  for  the  year  were  $10,000,000.  Adding  these  to  the 
average  profits  above  mentioned,  the  earnings  of  1903  should 
have  amounted  to  a  sum  sufficient  to  pay  dividends  on  the  pre- 
ferred stock,  although  it  was  not  expected  that  any  disbursement 
would  be  made.  In  other  words,  accepting  the  corporation's  own 
estimate  of  the  economies  which  can  be  secured  by  its  changes 
in  administration,  the  amount  of  its  earnings  falls  short  of  the 
amount  necessary  to  pay  dividends  on  the  common  stock. 

Before  proceeding  further  in  the  analysis,  let  us  test  the  ac- 
curacy of  this  conjectural  estimate  by  comparing  these  figures 
with  the  amount  actually  earned  by  other  companies  during 
1902,  a  year  which  was  more  favorable  for  the  shipping  industry 
than  1903.  Such  a  comparison  is  presented  in  the  following  table  : 


TONNAGE 

NET  EARNINGS 

NET 

EARNINGS 
PER  TON 

Cunard  Companv     

1  14,410 

S    I,2lt;.7t;o 

SlO.So 

North  (lennan  Llovd    
Hamburg-American     

583,042 
6;i,i  ;  i 

4,392,500 
4,  4  >  8,  1  08 

7-53 
6.8, 

International  Mercantile  Marine    . 

1,034,884 

16,107,000  (cst.) 

15-57 

It  thus  appears  that  the  estimated  tonnage  earnings  of  the 
Shipping  trust  for  1903  are  nearly  twice  the  average  amount  — 
$8.39  —  which  was  earned  during  the  preceding  year  by  its  lead- 
ing competitors.  Moreover,  the  German  companies  have  for 
many  years  operated  under  a  close  pool  which  secures  them  all 
of  the  economies  which  the  Shipping  trust  was  organized  to 
obtain.  Unless  some  other  factors  shall  be  discovered  by  the 
combination  to  increase  its  earnings,  these  preliminary  estimates 
will  eventually  require  some  revision. 


108  TRUSTS,    POOLS   AND   CORPORATIONS 

Accepting  the  same  figure  of  tonnage  earnings  for  the  Ship- 
ping trust  which  was  attained  in  1902  by  its  competitors, 
namely  $8.39  per  ton,  we  have  next  to  inquire  how  the  com- 
bination measures  up  to  its  interest  and  dividend  requirements. 
The  net  earnings  of  the  company,  on  this  basis,  would  stand  at 
$8,941,398,  leaving  $5,801,398  over  fixed  charges,  for  deprecia- 
tion, renewals,  and  replacements.  This  amounts  to  about  $5.60 
per  ton  as  compared  with  $4.30  per  ton  for  the  Hamburg- 
American  line  in  1902,  $6.19  for  the  North  German  Lloyd, 
and  $8.04  for  the  Cunard  line.  If  we  debit  the  earnings  of 
the  International  Mercantile  Company  with  $5.00  per  ton  for 
these  various  necessary  expenses,  an  amount  which,  considering 
the  age  of  their  fleet  and  the  necessity  of  providing  for  the 
redemption  of  their  bonds,  would  seem  to  be  no  more  than  is 
required,  and  if  we  assume,  as  before,  their  tonnage  earnings  at 
$8.39  per  ton,  the  Trust  has  only  $606,978  remaining  for  its  pre- 
ferred stockholders.  That  this  supposition  is  not  wide  of  the 
truth,  may  be  seen  from  the  experience  of  the  North  German 
Lloyd  Company  in  1902,  which  earned,  over  interest,  14,770,000 
marks,  and  credited  to  renewals  and  insurance  all  but  212,477 
marks  of  this  amount,  reducing  their  dividend  payments  from 
5,278,131  to  210,623  marks.  Taking  a  three  years'  average  of 
the  earnings  of  the  Cunard,  Hamburg-American,  and  North 
German  Lloyd  companies,  we  find  that  their  combined  depre- 
ciation and  insurance  charges  amount  to  324,719,112  out  of 
837,976,794  of  net  earnings,  or  about  65  per  cent.  It  is  impos- 
sible to  escape  the  conclusion  that  the  Shipping  trust  must  ap- 
propriate a  similar  proportion  of  its  profits  for  the  service  of  the 
company,  if  the  first  care  of  its  management  is  for  the  property 
of  the  company.  If  this  is  clone,  however,  a  readjustment  of 
the  capital  of  the  company  is  among  the  probabilities. 

We  have  not  reached  the  end  of  the  chapter.  The  Shipping 
trust  was  organized  during  a  period  of  great  prosperity,  when 
the  earnings  of  ocean  transportation,  although  depressed  some- 
what below  the  abnormal  figures  of  1900,  were  still  large.  To 
pass  final  judgment  upon  its  financial  future,  it  is  necessary  that 
we  cast  backward  and  discover,  if  possible,  from  the  history  of 
other  shipping  companies,  what  may  be  expected  if  earnings 
follow  the  course  of  former  years. 


THE    MERCANTILE    MARINE    COMPANY 


109 


In  the  accompanying  table  appears  the  income  account  of 
the  Cunard  Company  for  a  period  of  twenty  years,  including 
1883  and  1902. 

Ct'NARn  STEAMSHIP  LINE 


YliAK 

PROFITS, 
INCLI'DING 
BALANCE 

FORWARD 

RESERVED 

FOR 

DEPRECIA- 
TION 

RESERVED 

FOR 

INSURANCE 

TOTAL 
BALANCE 

DIVIDENDS 

INSURANCE 
FORWARD         KIND 
STANDS  AT 

£ 

£ 

£ 

£ 

£ 

y               £,  Often 
*             Written  Ib. 

1902 

263,617 

158,722 

24,686 

68,808 

64,000  (4  %) 

4,807        357,00° 

1901 

226,022 

167,900 

5,766 

65,984 

64,000  (4  %) 

1,984        350,000 

1900 

553,241 

284,488 

119,037 

143,434 

128,000  (8%) 

1  5,434     ;  35°,°00 

1899 

294,856 

173,223 

34,247 

83,527 

80,000  (5  °/) 

3,527        260,000 

1898 

261,691 

172,169 

29,496 

57,663 

56,000  (3i  %) 

1,663        235,000 

I897 

222,475 

166,938 

27,999 

41,691 

4O,OOO   (2.1,  %) 

1,691        212,000 

1896 

249,788 

184,822 

32,417 

42,181 

4O,OOO  (2|  %) 

2,181        202,000 

1895 

144,305 

180,325 

183,731' 

...          { 

deb.  int.  "1 
I.466/ 

187,000 

1894 

94,953  i   I77>104 

183,020- 

2,072 

230,000 

1893 

200,091       154,419 

39,966 

35,8683 

32,000   (2%) 

3,868 

322,000 

1892 

174,607      125,856 

33,496 

36,296* 

32,000  (2%)  :  4,296 

317,500 

I  89  I 

220,991    ,    125,426 

38,407 

52,382 

48,000  (3%)      4,382 

3  1  5  .000 

i8905 

246,601 

125,840 

43,144 

72,838 

64,000  (4  %)       8,838 

280,000 

1889 

350,203 

J3°,573 

f  41,918  ^ 
1  54,480  i 

175,469 

96,000  (6  %) 

4,988 

240,000 

iSSS'- 

3'4,736 

/  135,327 

46,8151    130,172 

64,000  (4  %)      2,700 

I    23,000 

40,472  j 

r     Debenture 

i     debt  re- 

1887 

254,482 

135,5°° 

77,839 

4M43 

40,000  (2  J  %)      1,143  -j     ducedfrom 

,£450,000 

L 

to  ,£96,000 

r 

Loss  of 

1  886 

160,910 

137,721 

23,189 

nothing 
left 

nothing  left 

j    '     Oregon 
|    '        costs 

nothing  ! 

L 

X,H3.24I 

1885 

iC'5,943 

141,506 

24,437            ]eft  '        nothing  left 

I4O,OOO 

(  S~,oi8   !    nothing      nothing  :  ] 

1884'    103.948  ;  123)000  :       k.ft           u.ft    •  |      •  •  -         i  •  •  •        117,001 

1883       146.920   '     93,134*       50,094           .   .   . 

none               1,270         150,094 

I  ^39,426  from  insurance  fund.  -  ^88,067  from  insurance  fund. 
:!  /."^o.ooo  from  insurance  fund.                                      4  ^"25.000  from  insurance  fund. 
"The   company  had  on   hand  at  the   end  of   1890  in   investments,  lulls,  and  cash, 

/5  50,02  2. 

II  /90,oco    debentures    paid    off   July    1st.       lialance    of    cash    and    imestments, 
^205,804. 

~  /~2^,ooo  taken  from  insurance  fund  and  added  to  sum  reserved  for  depreciation. 
?  Depreciation  fund  stands  at  ,£302,000. 


1 10  TRUSTS,    POOLS   AND    CORPORATIONS 

The  feature  of  the  movement  which  will  immediately  impress 
the  reader  is  the  extraordinary  fluctuations  of  net  earnings. 
From  a  minimum  of  ,£103,948  in  1884,  they  rose  to  a  maximum 
of  .£350,203  in  1889,  an  increase  of  237  per  cent.  From  that 
point,  although  fairly  maintained  until  1893,  they  fell  in  1894  to 
.£94,953,  the  smallest  figure  ever  reached.  The  depression  con- 
tinued during  1895,  but  in  1896  began  the  great  upward  swing 
which  carried  earnings  up  more  than  550  per  cent,  to  the  enor- 
mous total  of  .£553,241  in  1900.  From  this  maximum,  the 
decline  was  rapid,  profits  standing  at  ,£226,022  in  1901,  and 
.£263,617  in  1902.  Passing  over,  for  the  time  being,  the  explana- 
tion of  these  remarkable  fluctuations,  let  us  examine  the  dis- 
position of  profits  which  this  company  employed.  We  note  at 
once  that  the  reserves  for  depreciation  took  up  a  large  share  : 
.£3, 104,01 1  out  of  a  total  of  ^4,650,380.  Another  large  amount, 
,£787,905,  or  i6|  per  cent  of  the  total,  went  to  the  insurance 
fund,  which  the  company  has  always  maintained  at  a  high  figure. 
Out  of  the  surplus  remaining,  to  which  was  added  ,£182,493 
from  the  insurance  fund,  bringing  the  total  amount  available  for 
distribution  up  to  ^£940, 957,  ,£848,000  was  paid  in  dividends, 
leaving  .£93,957  to  be  carried  forward,  an  amount  successively 
included  in  the  annual  profits.  In  other  words,  out  of  ,£4,650,380 
of  profits  earned  in  20  years,  the  Cunard  Company  paid  out 
,£848,000,  or  1 8. 8  per  cent  to  its  owners,  and  kept  81.2  per  cent 
in  the  business.  We  note,  moreover,  that  the  disbursement  of 
dividends  was  by  no  means  regular.  In  six  years  out  of  the 
twenty,  nothing  was  paid  on  the  stock.  In  five  other  years,  less 
than  3  per  cent  was  paid,  and  in  only  one  year,  1900,  was  as 
much  as  8  per  cent  distributed  to  stockholders. 

We  note  also  with  what  extreme  care  the  directors  guarded 
their  insurance  and  depreciation  funds,  taking  every  occasion  of 
large  earnings  to  build  up  these  safety  deposits,  and  refusing  to 
sacrifice  to  the  temporary  advantage  of  the  owners  the  permanent 
welfare  of  the  company.  In  thirteen  years  out  of  the  twenty, 
the  profits  of  the  company  exceeded  ,£200,000,  aggregating 
-£3,^58,794.  Of  this  amount  only  .£816,000  was  paid  in  divi- 
dends, ,£2,842,794  being  carried  to  reserve.  The  shareholders 
reaped  no  small  benefits,  however,  from  their  enforced  self- 


THE    MERCANTILE    MARINE    COMPANY 


1 1 1 


denial.  In  four  years  of  the  period  1892-95,  the  insurance  fund, 
which  is  held  in  cash  and  securities,  was  drawn  upon  for  divi- 
dends or  to  maintain  the  depreciation  fund.  Of  the  ,£64,000 
paid  out  to  stockholders  during  these  four  years,  ,£55,000  came 
from  the  reserves. 

In  short,  it  was  only  by  the  most  careful  economy,  by  the 
utmost  prudence  and  conservatism  in  the  distribution  of  profits, 
that  the  Cunard  Company  was  able,  over  a  twenty-year  period, 
to  average  2.6  per  cent  to  its  stockholders  and,  during  the  past 
ten  years,  to  earn  3.1  per  cent  on  a  capital  which  at  no  time 
exceeded  the  book  value  of  its  ships. 

For  an  explanation  of  the  irregularity  of  these  profits,  \ve  turn 
to  the  nature  of  the  industry.  The  shipping  business  is,  of  all 
industries,  the  most  irregular.  It  is  liable  not  merely  to  the 
usual  alternations  of  prosperity  and  depression,  but  to  sudden 
fluctuations  of  rates  and  traffic  which  are  entirely  without  parallel 
in  any  other  branch  of  trade. 

To  begin  with,  the  industry  is  strictly  competitive.  The  high 
seas  can  never  be  monopolized.  Dockage  facilities  in  the  lead- 
ing countries  are  open  to  the  ships  of  all  the  world,  and  ship- 
yards will  furnish  a  cargo  steamer  at  a  moderate  price.  Under 
these  conditions,  a  permanent  control  of  the  shipping  industry, 
sufficient  to  maintain  rates  or  to  control  traffic,  is  out  of  the 
question.  Agreements  among  the  regular  lines  may  introduce  a 
certain  degree  of  stability  into  passenger  rates,  and  into  the 
freight  charges  on  the  higher  classes  of  commodities,  but  for  the 
great  mass  of  traffic,  the  raw  materials  and  rough  and  half- 
finished  products  of  commerce,  carriers  and  shippers  will  con- 
tinue, as  they  have  from  time  immemorial,  to  make  their  individual 
bargains,  and  the  rates  of  charge  will  continue  to  be  fixed  by  the 
higgling  of  the  market. 

This  situation  has  two  consequences.  If  at  any  port  the  sup- 
ply of  shipping  waiting  for  cargoes  exceeds  the  amount  of  busi- 
ness offered,  the  competition  between  owners  will  force  rates 
down  sometimes  to  the  smallest  admissible  margin  above  operat- 
ing expenses.  The  amount  asked  by  the  marginal  ship  will  fix 
the  rate  for  the  time  being  for  all  vessels  leaving  the  port.  On 
the  other  hand,  a  small  excess  of  tonnage  offered  will  have  an 


j.  (. 

r. 

J.  d. 

Port  Said     . 

7 

9 

to 

13  6 

•    7 

6 

to 

1  1 

Aden  .... 

.  ii 

6 

to 

16  6 

Bombay        ... 

.    12 

to 

18  6 

Colombo 

.     12 

to 

19 

Cape  Town 

.    19 

to 

30 

Rio  Janeiro 

.    II 

6 

to 

16 

112  TRUSTS,   POOLS  AND   CORPORATIONS 

equal  effect  in  raising  the  rate.  Some  classes  of  commodities 
can  be  delayed  in  shipment  longer  than  others,  and  some  vessel 
owners  can  afford  to  lay  up  a  portion  of  their  tonnage  rather 
than  accept  unremunerative  rates.  Generally  speaking,  how- 
ever, the  rule  holds  good.  From  every  port  and  on  every  line 
of  traffic,  the  rates  are  constantly  changing  in  a  way  which  would 
stagger  a  railway  traffic  manager,  although  he  was  deeply  versed 
in  the  theory  and  practice  of  rebates  and  special  concessions. 

For  example,  take  the  following  table  of  outward  rates  on 
coal  from  Wales  to  various  ports  in  1899  : 

PER  CENT  OF 
VARIATION 

74 
47 
43 
54 
59 
58 
39 

The  movement  of  grain  rates  from  the  United  States,  while  less 
irregular  than  the  figures  quoted  above,  is  also  subject  to  wide 
variations. 

Examples  of  more  extreme  fluctuations  are  easy  to  find.  The 
course  of  rates  in  the  British  market  in  1896  offers  a  typical  illus- 
tration of  the  extreme  instability  of  ocean  rates.  The  Economist, 
in  its  annual  review  of  the  shipping  industry  for  1895,  reported, 
at  the  close  of  that  year :  "  The  tonnage  afloat  is  enormously  in 
excess  of  the  world's  requirements,  and  so  long  as  this  continues 
we  cannot  see  that  there  will  be  an  improvement."  During  the 
early  part  of  1896,  this  condition  of  extreme  depression  con- 
tinued. Only  in  outbound  rates  to  the  East,  where  the  China- 
Japan  troubles  made  a  brisk  demand  for  shipping,  was  any 
profit  presented.  These  rates  advanced,  and  remained  on  a  high 
level  throughout  the  year.  A  large  number  of  ships,  finding  no 
profitable  employment  at  home,  went  out  to  the  East.  Once 
there,  however,  and  the  war  ended,  they  could  not  get  back  again, 
for  return  freights  were  not  to  be  had,  and  it  was  impossible  to 
return  such  a  long  distance  in  ballast  without  the  prospect  of 
remunerative  employment.  This  situation  left  a  large  number 


THE   MERCANTILE    MARINE    COMPANY  113 

of  cargo  vessels  stranded  in  eastern  ports,  unable  to  get  back  to 
western  waters.  A  large  part  of  the  world's  carrying  trade  was 
thus  locked  up.  The  available  supply  of  shipping  was  suddenly 
diminished.  The  tonnage  afloat  accessible  to  English  shippers 
was  no  longer  as  in  1895,  "enormously  in  excess  of  the  world's 
requirements." 

Upon  a  straitened  supply  was  now  precipitated  an  avalanche 
of  orders.  Says  the  Economist: 

The  corn  trade  in  the  past  year  assumed  a  novel  and  unexpected  posi- 
tion ;  the  production  of  the  world  was  slightly  short  of  the  consumptive 
requirements,  .  .  .  two  of  the  large  producing  and  exporting  countries 
(India  and  Australia)  being  actually  converted  into  considerable  importers, 
and  several  hitherto  small  importers  making  largely  increased  demands. 

The  general  trade  of  the  country,  as  the  Economist  notes,  main- 
tained the  improvement  and  expansion  awakened  and  started 
more  than  twelve  months  earlier. 

These  combined  influences  came  to  bear  on  the  freight  market  almost 
simultaneously ;  shippers  of  nearly  every  description,  all  wanting  the 
same  thing  at  the  same  moment,  with  a  rather  short  supply  of  the  article  ; 
result,  blind  competition  sending  up  the  price  of  tonnage  by  leaps  and 
bounds,  in  many  cases  200  to  300  per  cent,  from  the  end  of  September 
to  the  end  of  November.  .  .  .  By  so  much  as  the  rise  was  rapid,  by  so 
much  was  the  decline  equally  rapid,  and  at  the  close  of  the  year  we  find 
freights  all  around,  in  every  trade,  worse  if  anything  than  at  the  com- 
mencement.1 

This  experience  has  been  repeatedly  duplicated  in  every  market. 
It  is  true  that  the  total  supply  of  ocean  shipping  will  in  time 
become  available  to  relieve  any  congestion  ;  but  much  time  must 
often  elapse  before  relief  can  be  extended,  the  tonnage  must  be 
moved  at  once,  and  the  ship-owners  who  are  fortunate  in  being 
on  the  spot  reap  a  rich  harvest.  On  the  other  hand,  veasels 
which  have  gone  out  in  ballast  to  Argentine  or  the  United  States, 
expecting  full  cargoes  of  grain,  or  which  have  made  the  long 
voyage  to  Australia,  expecting  a  large  movement  of  wool,  suffer 
the  full  effects  of  a  crop  failure  or  a  small  wool  clip. 

The  following  table  shows  the  fluctuations  over  a  ten-year 
period  in  four  of  the  leading  items  in  the  world's  export  trade. 


TRUSTS,    POOLS   AND   CORPORATIONS 


fcs« 

u.  S   < 

u.   5    < 

».  s  2i 

EXPORT 

O    O    u 

EXPORT 

0    0    U 

EXPORT 

o  o  a 

EXPORT  OF 

0    C    w 

S 

OF  WHKAT 

z  ^ 

OF  COTTON 

1    M   « 

OF  CORN 

z  ^  « 

WHEAT  FROM    z  ""  M 

u 

FROM  U.  S. 

"If 

FROM  U.  S. 

6  |  § 

FROM  U.  S. 

W    Eli    •- 

U  0   c 

a  a  ™ 
RUSSIA         U  u  o 

Bushels 

1=1 

Bales 

w  s  a 

Bushels 

III 

Thousand  cwt. 

S      £       K 

1892 

225,665,812 

5,858,000 

76,602,285 

26,297 

1893 

191,912,635 

—  15 

4,390,000 

-27 

47,121,894 

-39 

50.351 

+  91 

1894 

164,283,129 

-  14 

5,232,000 

+  19 

66,489,529     +  48 

65,966       +31 

1895 

144,812,718 

—   12 

6,726,000 

+  29     28,585,405    -  57 

76,453 

+  16 

1896 

126,443,968 

—   12 

4,627,000 

-31    lor,  100,375  [+243 

70,774 

-    6 

1897 

145,124,972 

+  J5 

5,979,000 

+  29:  178,817,417    +  77 

68,670 

—      2 

1898    217,306,004 

+  49 

7,540,000 

+  26  212,055,543  :  +  19 

57,047 

—  15 

1899 

222,618,420 

+      2 

7,313,000 

-    3    177,255,046;  -  17 

34,466 

-40 

1900 

186,096,762 

-   17 

5,946,000 

—  19    213,123,412    +  20 

37,627 

+    9 

1901 

215,990,073 

+   15 

6,538,000 

+    9 

181,403,473 

—  20 

44,626 

+  19 

Many  of  these  fluctuations  took  the  shipping  trade  by  surprise, 
and  either  too  few  or  too  many  boats  were  available.  In  other 
cases,  the  supply  of  shipping  the  world  over  was  either  excessive 
or  redundant,  and  freights  fell  or  rose  to  correspond. 

So  much  for  the  temporary  fluctuations  of  ocean  freight  rates 
and  tonnage.  There  are  also  movements  of  longer  duration,  cor- 
responding to  the  ebb  and  flow  of  general  business,  but  subject 
in  peculiar  measure  to  the  influence  of  special  forces.  From 
1893  to  1897,  for  example,  the  leading  commercial  countries  were 
suffering  from  a  commercial  depression  which  caused  a  general 
decrease  in  the  tonnage  of  international  trade,  and  a  still  greater 
fall  in  the  value  of  exports  and  imports.  The  effect  of  this  situ- 
ation upon  the  shipping  industry  has  been  already  indicated. 
Tonnage  could  not  be  decreased,  and,  in  fact,  the  tonnage  of  the 
world  during  these  three  years  increased.  The  result  was  an 
unprecedented  depression  in  the  shipping  industry.  In  1893, 
the  Economist's  review  reports  a  large  number  of  steamers  laid 
up  and  a  number  disposed  of  at  forced  sale.  In  1894,  the  report 
was  "low,  unprofitable  freights  and  declining  values  of  property 
engaged  ;  the  whole  of  the  enormous  trade  has  brought  little  or 
no  profit,  and  a  very  bare  margin  over  working  expenses,  far 
from  enough  to  cover  depreciation."  In  1895,  came  a  year 
"which  will  not  readily  be  forgotten  by  the  ship-owners.  .  .  . 


THE    MERCANTILE    MARINE    COMPANY  115 

Our  anticipations  have  been  to  the  full  realized,  and  probably  a 
worse  year  than  the  present  has  not  been  experienced  by  the 
very  oldest  in  the  business."  !  The  condition  of  the  trade,  in 
1896,  as  already  remarked,  was  little  better. 

During  the  four  succeeding  years,  the  situation  was  entirely 
changed.  The  widespread  industrial  revival  caused  a  large  in- 
crease in  the  value  of  foreign  trade  ;  and  the  shipping  trade,  as 
illustrated  by  the  rapid  and  extraordinary  rise  in  the  profits  of 
the  Cunard  Company,  became  very  profitable.2  The  main  sup- 
port of  the  market,  during  1897  ancl  1898,  was  the  American 
export  trade,  which  was  characterized  in  the  Economist's  annual 
review  of  1897  as  follows: 

It  contributed  largely  toward  sustaining  rates  in  the  early  months,  and 
causing  a  material  advance  during  the  autumn  and  late  summer  in  all 
other  rates  by  the  ready  absorption  and  continued  demand  for  tonnage 
of  all  descriptions  from  the  leviathan  Sooo  to  20,000  ton  cargo  boats, 
to  small  fruit  steamers:'1 

In  1899  the  advance  continued.  General  trade,  the  world 
over,  was  active,  and  the  South  African  war  resulted  in  the 
largest  withdrawal  of  shipping  that  had  been  known  for  more 
than  a  generation.  An  outbreak  of  hostilities,  involving  even 
a  second-rate  power,  always  demands  the  services  of  a  large 
amount  of  shipping.  Even  the  effect  of  the  Greco-Turkish  war 
was  sensibly  felt ;  the  influence  of  the  China-Japanese  war  has 
been  already  mentioned  ;  and  the  Spanish-American  war  mate- 
rially contributed  to  the  prosperity  of  the  trade  in  1898.  The 
shipping  industry  can,  over  a  period  of  years,  depend  with  reason- 
able certainty  upon  the  assistance  of  several  wars.  If  inter- 
national disturbances  occur  during  a  period  of  depression,  the 
freight  and  traffic  situation  is  relieved,  and  if,  as  in  the  case  of  the 
Boer  war,  the  outbreak  of  hostilities  comes  hard  upon  the  heels 
of  general  and  abounding  prosperity,  the  result  is  enormous 

1  /•'.i\'iii'»ii.<f.  Vol.  I, IV,  supplement,  p.  26. 

-The  combined  exports  and  imports  of  the  I'nited  States,  Germany,  and  Great 
1'iiitain.  in  18115  were  valued  at  ^6.525.207.441.  In  1901,  six  years  later,  their  value 
had  risen  to  >S,6  55. 562,581.  A  larjje  portion  of  this  increase  was  undoubtedly  due 
to  the  rise  ol ~  priees,  but  the  i;ain  in  tonnage  was  ehielly  responsible. 

:i  /•*.ii>>i0»iist,  \  ol.   L\  I,  supplement,  p.  J4. 


ii6  TRUSTS,   POOLS  AND   CORPORATIONS 

profits  for  all  ship-owners.  Not  only  does  war  increase  the  de- 
mand for  ships,  usually  on  terms  highly  favorable  to  the  owners, 
but  it  raises  the  level  of  freight  the  world  over  by  reducing  the 
supply  of  tonnage. 

These  results  followed  from  the  South  African  conflict.  At 
the  close  of  1900,  the  British  government  had  withdrawn  some 
2,000,000  tons  of  shipping,  an  amount  nearly  equal  to  the  total 
steam  tonnage  of  Germany,  and  nearly  double  that  of  France. 
In  1900,  moreover,  the  troubles  in  China  required  the  transpor- 
tation of  large  numbers  of  troops  to  the  East,  and  throughout 
the  Boer  war,  a  large  coal  tonnage  was  kept  moving  to  the 
Cape.  The  result,  as  stated  in  the  Economist's  annual  review, 
was  that 

The  tonnage  taken  on  time  charter  for  all  trades  during  the  past  year 
has  been  unprecedented.  The  rates  paid  by  our  Government  for  trans- 
ports were  2os.  per  gross  register  per  month,  and  in  some  cases  more. 
Many  charters  in  ordinary  trades  were  made  for  long  periods  at  very 
remunerative  rates.  Modern  boats  have  commanded  from  js.  to  i  is. 
6d.  per  gross  ton,  according  to  the  trade  and  length  of  charter.1 

In  1901,  however,  the  tide  turned.  During  the  preceding  four 
years,  the  supply  of  tonnage  had  been  increased  4,049,260  tons, 
and  with  the  close  of  the  war,  the  British  government  rapidly 
released  the  ships  which  it  had  employed.  To  make  matters 
worse,  the  American  corn  crop  was  a  failure,  and  the  industrial 
depression  on  the  continent  reduced  the  amount  of  freight  move- 
ment. Rates  fell  30  per  cent  throughout  the  year,  and  have 
continued  to  fall  during  1902  and  1903,  the  close  of  1903  find- 
ing the  trade  extremely  depressed,  with  little  prospect  of  early 
improvement. 

We  find  in  this  hasty  review  of  the  recent  history  of  the  ship- 
ping trade  an  explanation  of  the  irregularity  of  the  profits  of  the 
Cunard  Company,  and  can  understand  why  the  directors  have 
pursued  such  a  niggardly  policy  in  the  disbursement  of  profits. 
The  management  of  a  shipping  company  lives  in  constant  appre- 
hension. Exposed  to  increasing  competition  on  every  hand ; 
compelled  every  year  to  build  new  and  larger  boats  to  keep  pace 

1  Economic,  Vol.  LX,  supplement,  p.  28. 


THE    MERCANTILE    MARINE    COMPANY  117 

with  their  rivals;  anxiously  scanning  the  commercial  horizon  for 
signs  of  business  depression,  crop  failures,  famines,  or  labor  dis- 
turbances ;  hoping  and  scheming  for  a  few  crumbs  of  subsidy, 
to  introduce  a  modicum  of  fixed  income  into  their  earnings ; 
engaged  in  a  business  as  shifting  and  unstable  as  the  sea  on 
which  that  business  is  conducted  —  is  it  any  wonder  that  the 
experienced  ship-owners  hold  fast  to  their  profits  and  regard  the 
results  of  a  year  like  1900  as  a  gift  of  Providence  to  be  guarded 
with  zealous  care  ? 

Into  this  peculiar  business  came  the  promoters  of  the  Inter- 
national Mercantile  Marine  Company.  Attempting  to  apply  to 
the  shipping  industry,  the  same  principles  of  consolidation  and 
capitalization  which  had  been  superficially  successful  on  land, 
they  imposed  upon  the  new  corporation  an  unusually  heavy 
burden  of  capitalization,  and  they  so  arranged  the  capitalization 
as  to  make  conservative  financial  management  of  the  new  com- 
pany very  difficult.  The  purchase  price  of  most  of  the  sub- 
sidiary companies  was  based  on  the  profits  of  1900.  In  the 
vendors'  agreement  between  the  syndicate  and  the  White  Star 
line,  for  example,  it  was  stated  that 

the  valuation  of  the  said  shares  hereunder  and  under  said  principal  con- 
tract shall,  subject  as  hereafter  provided,  be  a  sum  equal  to  ten  times 
the  net  profits  of  the  company  of  the  year  1900,  subject  to  the  following 
exceptions  .  .  .  (a)  a  sum  for  depreciation  equal  to  6  per  cent  on  the 
amounts  at  which  the  property  of  the  company  stood  on  its  books  on 
the  first  day  of  January,  1900,  and  a  sum  for  insurance  .  .  .  equal  to 
^3  los.  on  the  same  amount  .  .  -1 

It  was  further  stipulated  that  the  earnings  of  steamships  em- 
ployed by  the  British  government  should  "be  credited  .  .  .  with 
net  earnings  of  the  same  amount  as  were  earned  or  would  be 
earned  by  similar  steamships  of  the  company  for  the  same  periods 
in  their  ordinary  trades." 

The  year  1900,  as  has  been  shown,  was  one  of  abnormal  prof- 
its. The  Cunarcl  Company  nearly  doubled  its  net  earnings,  and 
it  is  reasonable  to  suppose  that  other  companies  were  equally 


Ii8  TRUSTS,   POOLS  AND   CORPORATIONS 

fortunate.  A  partial  record  of  the  prosperity  of  this  year  is  fur- 
nished by  the  record  of  dividends.  The  average  dividend  of 
twenty-five  leading  companies  in  1896  was  6  per  cent;  in  1898, 
7.7  per  cent ;  and  in  1900,  9.4  per  cent.  In  the  extract  from  the 
vendors'  agreement  quoted  above,  we  find  a  recognition  of  the 
fact  that  the  profits  of  1900  were  exceptional,  viz.,  the  provision 
reducing  the  earnings  of  ships  employed  in  the  government 
service  to  the  general  average  of  private  employment.  This 
reservation,  however,  does  not  go  far  enough.  The  mere  fact 
of  a  large  government  employment,  as  has  been  shown,  was 
sufficient  to  heavily  increase  the  earnings  of  ships  in  private 
employment,  and  in  capitalizing  the  earnings  of  this  single  year, 
the  promoters  of  the  Shipping  trust  made  a  serious  mistake. 

Indeed,  so  apparent  was  the  mistake,  and  so  clearly  did  the 
trade  foresee  that  reaction  was  impending,  that  this  fact  was 
openly  urged  upon  the  shareholders  by  the  Leyland  line  as  an 
inducement  to  fall  in  with  Mr.  Morgan's  plans.  Said  Mr.  Eller- 
man,  in  May,  1901,  at  the  shareholders'  meeting  of  Frederick 
Leyland  and  Company : 

The  outlook  for  freights  in  the  near  future  is,  in  my  judgment,  an 
uncertain  one.  We  have  had  prosperous  times,  and  I  feel  that  the 
near  future  may  bring,  at  all  events  for  a  time,  a  reflux  of  bad  times, 
particularly  when  the  tonnage  which  is  usually  employed  in  the  North 
Atlantic  trade,  but  which  is  now  employed  in  government  transport 
work,  returns  to  normal  employment  ;  in  addition  to  which  a  large 
amount  of  tonnage  is  building  in  America  for  employment  in  the 
Atlantic  trade  .  .  -1 

Not  only  was  the  amount  of  capitalization  excessive,  but  what 
was  more  important,  the  arrangement  of  the  capital  of  the  Ship- 
ping trust,  taken  in  connection  with  the  amount  of  the  different 
issues,  was  open  to  serious  criticism.  In  addition  to  an  amount 
of  bonds  fully  sufficient  to  absorb  the  maximum  earnings  of  the 
company,  a  liability  of  $54,600,000  of  cumulative  preferred  stock 
was  assumed,  all  of  whose  passed  dividends  must  be  paid  before 
the  common  stock  receives  anything.  Our  previous  discussion 
has  shown  the  shipping  business  to  be  so  irregular  that  even  \vith 

1  Report  of  Commissioner  of  Navigation,  1901,  p.  321. 


THE    MERCANTILE    MARINE   COMPANY  119 

the  most  moderate  capitalization,  in  some  years  dividends  must 
be  passed,  and  in  other  years  paid  out  of  reserve.  At  all  times, 
the  direetors  should  have  a  free  hand  in  determining  whether 
profits  shall  be  distributed  to  stockholders,  used  for  replacements 
and  depreciation,  invested  in  securities,  or  held  in  cash.  The 
irregularity  of  the  business  is  so  great,  that  a  free  disposition  of 
profits  to  stockholders  is  out  of  the  question.  The  policy  of  a 
well-managed  shipping  company  is  dominated  by  the  necessity 
of  reserving  from  two-thirds  to  three-fourths  of  the  profits  in 
order  that  one-fourth  may  be  paid  out  in  dividends.  In  view  of 
this  fact,  the  absolute  amount  of  the  Shipping  trust's  capitaliza- 
tion is  of  much  less  consequence  than  the  nature  of  the  liabilities 
which  it  includes.  The  fact  that  the  company  is  excessively 
capitalized  is  of  less  consequence  than  the  fact  that  the  arrange- 
ment of  this  capitalization  is  such  as  to  make  prudent  financial 
administration  very  unpopular  with  stockholders.  In  this  arrange- 
ment, fixed  charges  and  obligatory  payments  predominate.  Of 
the  $170,600,000  of  capital,  $122,600,000  consist  of  bonds  and 
cumulative  preferred  stock.  If  the  debenture  interest  is  passed, 
while  the  form  of  the  bonds  puts  foreclosure  proceedings  out  of 
the  question,  the  unpaid  interest  must  be  discharged  before  any- 
thing is  paid  on  the  preferred  stock  ;  and  if  the  preferred  stock- 
holder is  forced  to  await  the  convenience  of  the  corporation,  the 
hope  of  the  common  stockholder  of  receiving  anything  on  his 
investment  becomes  remote.  In  other  words,  a  conservative 
administration  of  the  finances  of  the  shipping  consolidation 
involves  a  series  of  postponements,  an  accumulation  of  deferred 
claims.  The  collection  of  a  reserve  sufficient  to  pay  dividends 
in  years  of  depression,  if  we  may  judge  from  the  experience  of 
other  companies  capitalized  on  a  basis  similar  to  that  of  Inter- 
national Mercantile  Marine,  is  likely  to  be  seriously  interfered 
with  by  the  importunities  of  deferred  claimants. 

It  would  be  going  too  far  to  say  that  the  International  Mercan- 
tile Marine  Company  is  a  failure.  Its  future  lies  in  the  hands  of 
the  stockholders.  If  they  will  sanction  a  policy  of  conservatism 
in  the  distribution  of  earnings  there  is  no  reason  to  suppose  that 
the  preferred  stock  of  the  company  may  not  eventually  be  raised 
to  the  rank  of  an  investment.  The  unfortunate  experience  of 


120  TRUSTS,   POOLS   AND   CORPORATIONS 

the  corporation  up  to  the  present  time,  however,  emphasizes  the 
fact  that  it  is  necessary,  in  arranging  the  capitalization  of  a  new 
company,  to  take  into  careful  account  the  conditions  of  the  busi- 
ness in  which  the  new  concern  is  to  operate,  and  in  every  case  to 
assume  that  industrial  history  is  to  be  repeated.  The  "  economies 
of  combination  "  are  no  doubt  considerable,  but  they  are  too  prob- 
lematical to  be  safely  included  in  an  estimate  of  earnings  available 
for  distribution  to  stockholders. 

EDWARD  SHERWOOD  MEADE. 


VII 

THE   CAPITALIZATION    OF    PUBLIC-SERVICE 
CORPORATIONS1 

EXAMINATION  of  the  statutes  and  the  judicial  decisions 
of  our  American  commonwealths  reveals,  aside  from  those 
cases  where  no  definite  policy  has  ever  been  entertained,  two  dis- 
tinct theories  as  to  the  proper  basis  for  capitalization  of  corpora- 
tions. One  is  that  the  total  amount  of  stock  and  bonds  issued 
should  stand  in  a  definite  relation  to  the  actual  investment  of  cap- 
ital in  the  enterprise.2  The  other  is  that  capitalization  should  be 
based  upon  earning  capacity  alone,  let  the  source  of  such  revenue 
power  be  what  it  may,  —  property,  patents,  franchises,  or  mere 
good  will.  Under  the  first  policy,  an  enterprise  to  be  capitalized 
at  $1,000,000  must  represent  that  sum  of  money  paid  in  at  some 
time,  either  as  cash  or  an  equivalent  in  tangible  property.  This 
is  the  policy  consistently  followed  in  Massachusetts,  and  some- 
what less  stringently  perhaps  in  Connecticut.3  Five  years  ago 
a  reform  in  this  direction  was  seriously  proposed  for  New  York, 
although  little  seems  to  have  been  actually  accomplished.'1 

The  second  policy  presupposes  that,  at  a  market  rate  of  6 
per  cent,  an  earning  capacity  of  $60,000  per  year  is  properly 
capitalizable  at  $1,000,000,  be  the  actual  investment  what  it  may. 
The  franchise  or  the  good  will,  it  is  contended,  can  be  sold  for 
valuable  consideration.  In  the  eyes  of  the  law  it  is  property 

1  From  the  Quarterly  Journal  of  Economics,  Vol.  XV,  1  900,  pp.  106-137. 

2  For  the  purposes  of  this  article  both  stock  and  bonds  are  alike  classed  as  capi- 
tal.     Cf.  the   reasoning  in   Statistics  of  Railways  in   the   United   Stales,  iSSS,  p.   13. 
The  inclusion  of  floating  debt  is  variously  viewed  in  different  states. 

:!  In  Connecticut,  until  recently,  special  legislation,  especially  in  the  case  of  street 
railway  corporations,  prevailed.  For  this  reason  the  general  laws  mean  but  little, 
save  for  those  traction  companies  organized  since  1893. 

4  A  special  committee  of  the  Assembly  reported  in  favor  of  limiting  capitalization 
to  one  and  one-half  limes  the  cost  of  construction. 


121 


122  TRUSTS,    POOLS   AND   CORPORATIONS 

during  the  period  of  its  life  at  all  events.1  Even  in  Massachu- 
setts it  is  considered  tangible  enough  to  be  attachable  for  debt.2 
This  second  policy  allows  the  inclusion  of  the  franchise  value  — 
that  is  to  say,  the  surplus  earning  capacity  over  a  normal  return 
upon  the  investment  —  in  the  nominal  capitalization.  And  the 
limit  of  issues  of  stock  and  bonds  is  fixed  only  by  the  amount  of 
such  actual  or  estimated  earnings,  as  the  case  may  be.  Thus 
the  State  Commission  in  1899  provided  for  allowance  to  the 
street  railway  company  of  Detroit  of  38,000,000  for  its  plant 
and  of  $8,500,000  for  its  franchise,  this  latter  being  merely  the 
capitalization  of  the  surplus  earnings.3  Among  our  American 
commonwealths  the  most  flagrant  examples  of  unlimited  capi- 
talization occur  under  the  laws  of  West  Virginia,  Delaware,  and 
New  Jersey.  In  the  first  of  these,  no  limitation  whatever  is 
placed  upon  stock  issues  beyond  payment  of  a  small  registra- 
tion tax.  The  Delaware  constitution  follows  the  usual  statutory 
enactment  of  other  states,  prohibiting  all  issues  of  stock  except 
for  money  paid,  labor  done,  or  property  actually  received.  The 
absence  of^  all  administrative  control,  and  the  apparent  failure 
of  the  state  courts  to  rule  adversely,  naturally  renders  this  law 
of  no  effect.  New  Jersey  has  met  the  issue  adroitly.4  Its  Cor- 
poration Act,  as  revised  in  1896,  recites  that  "  nothing  but  money 
shall  be  considered  as  payment  of  any  part  of  the  capital  stock  "  ; 
except  that  any  corporation  may  purchase  property  by  the  issue 
of  securities,  in  which  case  "the  judgment  of  the  directors  as  to 
the  value  of  the  property  purchased  shall  be  conclusive."  The 
status  of  Maine,  formerly  a  refuge  for  over-capitalized  companies, 
has  been  recently  reversed  without  modification  of  its  statutes 
through  a  decision  of  its  Supreme  Court.  This  has,  in  effect, 
held  stockholders  liable  as  against  a  judgment  creditor  to  the 

1  Numerous  decisions  have  established  this  clearly,  among  tlum  primarily  that  of 
the  Monongahela  Bridge  Company,  148  U.  S.  312,  and  144  Pa.  St.  36;,  in  case  of 
the  Mifflin  Bridge  Company;  and  recently  in  IVashlntrn  v.  Xiitiom.il  II' (.ill  J\i/>tr 
Company,^  Fed.  Rep.  17. 

-  Public  Statutes,  chap.  105,  30-38.  Cf.  the  case  of  Brokaw  P.rothers,  establish- 
ing that  in  private  business  good  will  —  that  is  to  say,  capitali/.ed  future  prospects  — 
is  not  taxable.  J:innn,ial  Chronicle,  LXIX  (1899),  p.  1086. 

3  Street  Raihi'ay  Journal,  1899,  pp.  477-483. 

4  The  Chicago   Hanker,  I,  1889,  pp.  407-411,  gives  interesting  data  on  the  history 
of  New  Jersey  legislation. 


PUBLIC-SERVICE   CORPORATIONS  123 

amount  of  the  balance  of  the  capital  stock  at  par,  over  and 
above  the  value  of  the  tangible  property.1  This  decision,  based 
upon  the  theory  that  such  stock  is  not  yet  fully  paid  up,  has 
already  acted  as  a  salutary  deterrent  in  many  cases. 

The  best  examples  of  the  effect  of  the  unrestrictive  policy 
is  to  be  found  in  the  industrial  combinations  organized  in  the 
United  States  during  the  last  few  years.  Excluding  some  of 
the  peculiarly  speculative  ones,  thirty-nine  of  the  trusts  report- 
ing to  the  expert  of  the  Industrial  Commission  indicate  that 
their  property  owned  is  worth,  even  at  prevailing  high  market 
prices,  but  64.42  per  cent  of  their  nominal  capitalization.2  It  is 
rare  that  the  preferred  stock  and  bonds  do  not  fully  equal  the 
value  of  the  plant,  stock,  and  cash  on  hand,  leaving  the  huge 
mass  of  common  stock  to  represent  good  will  or  estimated  earning 
capacity.  Under  British  company  law  much  the  same  condi- 
tions are  coming  to  prevail.  Thus  the  English  Sewing  Cotton 
Company's  capital  is  atmospheric  to  the  extent  of  one-quarter, 
that  of  the  Cotton  and  Wool  Dyers'  Association  being  more 
than  half  fictitious.3  That  similar  inflation  in  the  case  of  our 
railroads  was  formerly  the  rule  is  equally  well  known,  honorable 
exception  being  made  of  a  few  companies,  such  as  the  Lake 
Shore,  Chicago  &  Alton,  and  the  Old  Colony  of  Massachusetts.? 
It  is  probable,  however,  that  in  the  case  of  many  railroads  these 
abuses  have  of  late  been  somewhat  mitigated.5  Much  of  the 
water  has  been  expunged  from  the  poorer  roads  through  rigid 
reorganization  in  periods  of  depression,  such  as  1893-98. 
And,  in  the  case  of  the  stronger  ones,  the  properties  have  been 
improved  from  surplus  earnings,  so  as  to  fill  out  their  once  too 
generous  allotments  of  capital.  This  does  not  seem  to  be  true 
to  an  equal  degree  in  England,  where  over-capitalization  of  the 
railroads  still  seems  to  be  on  the  increase,  owing  to  their  peculiar 

1  ///</;r  v.   Tohcy,  19  All.  Rep.  904. 

2  Bulletin    Cnited   States   Department   of  Labor,   Xo.   29    (1900),]!.  671.     Cf.  the 
cases  of  the    Tinted   States    Leather  Company  and   the    1'Yderal  Steel  Company.      In 
both  the  preterred  stock  bought  the  plants,  while  the  remainder  went  mainly  to  com- 
missions and  promoters'  profits.      Bra^strccff,  1899.  pp.  436  and  531. 

:i  Economist  (London),  looo,  p.  552. 

4  /'i>iii>i,-iirl  C '//;•,;;//',/,.-,  LYII,  p.  205;    LX,  p.  352;    and  I, XII,  pp.  347  and  4So. 

•-'  Cf.    '/'i'u'  Ciiit'ii^Li  lliinkt-r,  \  (1900),  pp.  33^-339. 


124  TRUSTS,    POOLS   AND   CORPORATIONS 

methods  of  finance,  of  which  we  shall  have  occasion  to  speak 
later.1 

Two  arguments  in  favor  of  permission  to  capitalize  earning 
capacity  or  future  prospects,  rather  than  mere  investment,  may 
justly  be  advanced.  One  is  that  in  no  other  way  can  the  risks 
incident  to  a  novel  enterprise,  repelling  timid  capital,  be  over- 
weighted by  possible  profits  through  premiums  in  the  form  of 
securities  purchasable  at  a  discount.  This  argument,  however, 
presupposes  risk,  —  a  condition  entirely  absent  from  many  of 
the  public-service  companies,  even  at  the  outset  of  their  careers. 
It  also  assumes  that  the  persons  who  take  the  risk  are  the  ones 
who  ultimately  reap  the  rewards.  This,  also,  is  a  fallacy  in  too 
many  cases ;  since  the  capital  really  risked  in  the  plant  is  often 
raised  on  bonds,  which  receive  but  a  moderate  return,  keeping 
them  near  par  at  all  times ;  while  the  speculative  profits  come 
to  the  shareholders  who  acquire  the  stock  for  little  or  who  take 
it  for  nothing  as  a  reward  for  promotion.2  The  second  argu- 
ment has  somewhat  more  force.  Mere  plant  or  dead  property 
becomes  profitable  only  through  operation.  This  requires  a 
quick  capital  in  the  form  of  credit  or  of  cash.  Without  such 
working  capital,  the  plant  not  being  a  "going"  concern  loses 
much  of  its  value.3  Consequently,  it  is  urged,  capital  in  excess 
of  the  value  of  the  plant  may  rightfully  be  created  for  this  pur- 
pose, by  the  sale  of  stock  or  bonds.  The  importance  of  this 
argument  in  the  case  of  private  companies  cannot  be  denied. 
Recent  evidence  tends  to  show  that  an  amount  varying  from 
15  to  175  per  cent  of  the  value  of  the  plant  is  in  most  of  the 
industrial  organizations  devoted  to  working  capital.4  In  fact, 
one  of  the  powerful  incentives  to  the  formation  of  trusts  is  the 
desire  of  the  individual  producers  to  be  relieved  from  the  strain 

1  Woodlock,  in  the  Engineering  Magazine,  XI,  p.  238.  Cf.  also  Financial  Chron- 
icle, LV  (1892),  p.  1061,  comparing  the  Pennsylvania  Railroad  and  the  Midland. 

-  On  the  prunvitinn  "f  companies,  see  a  note  by  the  present  writer  in  Journal  of 
Political  Economy,  VIII,  p.  535. 

>int  was  covered  in  the  recent  Xewburyport  water-works  award,  to  be 


discusse< 
4  Bullet 


working 

Associatioi 


i  United  States  Department  of  Labor,  Xo.  29  (1900),  p.  672.  Brad- 
)<  P  73°'  cites  two  trusts  handicapped  from  failure  to  procure  sufficient 
vay.  See  also  Papers  and  Proceedings  American  Kconomic 


1900,  p.  150. 


PUBLIC-SERVICE    CORPORATIONS  125 

of  dependence  upon  the  banks  for  their  quick  capital.  A  dif- 
ference between  the  public-service  company  and  a  private  cor- 
poration is,  however,  discoverable  in  this  :  that,  as  a  rule,  the 
possession  of  a  valuable  franchise,  attachable  for  debt,  as  we 
have  seen,  is  sufficient  security  to  enable  working  capital  to  be 
raised  by  the  ordinary  means. 

The  evils  incident  to  allowing  a  wide  divergence  in  either 
direction  between  actual  investment  and  nominal  capitalization 
are  quite  apparent.  Among  these,  as  applied  to  public-service 
companies,  the  most  important  of  course  is  that  all  relationship 
between  the  charges  to  the  public  for  service  and  the  net  profits 
upon  the  real  capital  concerned  is  obscured.  The  actual  return 
upon  investment  can  never  be  precisely  determined  without  an 
appraisal  of  the  property.  And,  inasmuch  as  such  an  inventory 
subverts  the  primary  purpose  of  over-capitalization,  it  is  a  difficult 
matter  to  have  it  authoritatively  taken.  The  case  of  the  Lynn 
and  Boston  Street  Railway  Company,  now  pending  in  Massa- 
chusetts, is  in  point.  Having  been  manipulated  under  exemption 
from  general  statutes  to  a  high  degree  of  inflation  through  suc- 
cessive consolidations,  its  directorate  now  bitterly  opposes  the 
attempt'  of  the  Railroad  Commissioners  to  ascertain  the  real 
basis  upon  which  its  securities  rest.  This  suggests  a  second 
fundamental  evil  of  over-capitalization,  the  absence  of  all  ade- 
quate security,  —  first,  for  the  creditor,  and,  secondly,  for  the 
shareholders,  —  especially  in  any  terminable  enterprise.  As  to 
the  first  of  these,  it  is  obvious  that  borrowing  capacity,  while 
dependent  upon  current  revenue  for  its  interest,  must  ultimately 
rest  upon  the  attachable  property  for  final  security.  And  the 
maintenance  intact  of  this  capital  —  too  often  taken  as  synony- 
mous with  property  —  is  one  of  the  leading  objects  of  the 
law  regulating  limited  liability.1  As  for  the  possible  losses  of 

1  The  inadequacy  of  the  law  to  prevent  dividends  paid  at  the  expense  of  capital, 
especially  in  Kn^'land,  is  well  described  in  the  Economic  Journal^  (1000),  p.  o; 
and  the  /•>.'//<>////>/,  iSSS,  p.  407,  and  1800,  p.  919.  Dieksee,  Auditing,  is  also  very 
<,'ood.  Where  the  law  permits  the  bonding  of  an  enterprise  up  to  the  full  amount 
of  the  capital  stock,  security  fur  this  indebtedness  can  only  be  attained  by  keeping 
capitalisation  well  within  the  value  of  tangible  plant.  The  stricter  Connecticut  and 
Nebraska  laws,  limiting  bonded  debt  to  one-half  and  two-thirds  of  the  capital  stock 
respectively,  would  seem,  from  the  creditor's  view-point  alone,  to  permit  oi  a  greater 
latitude  in  this  respect. 


126  TRUSTS,    POOLS   AND   CORPORATIONS 

shareholders  in  an  over-capitalized  concern  at  its  dissolution, 
the  danger  in  most  of  our  public-service  companies  would  seem 
to  be  remote.  For  the  franchise  grants  to  the  older  companies 
being  perpetual,  and  the  growth  of  population  steadily  enhanc- 
ing profits,  dissolution  can  never  mean  more  than  a  resale  at 
high  prices  or  merger  in  a  succeeding  corporation.  Only  under 
the  newer  forms  of  terminable  franchise  may  such  loss  probably 
occur  to  the  shareholders.  And  it  is  to  be  presumed  that  they 
will  safeguard  their  interests,  or  at  least  should  be  compelled 
to  do  so,  by  a  policy  of  amortization  and  of  writing  off  for 
depreciation.1 

The  rigid  policy  of  Massachusetts  respecting  its  public-ser- 
vice corporations  is  in  large  measure  an  outgrowth  of  its  heredi- 
tary policy  towards  the  domestic  railroad  companies,  somewhat 
halting  at  first,  but  afterwards  clearly  defined  by  its  eminent 
board  of  Railroad  Commissioners.  The  corporate  evil  of  rail- 
road stock  issued  merely  as  a  bonus  to  stimulate  the  sale  of 
bonds  which  are  in  themselves  sufficient  to  defray  all  expenses 
of  construction  has  never  been  tolerated.  Its  railroads  have,  to 
a  greater  extent  than  in  any  other  state,  perhaps,  been  built  by 
sales  of  stock  rather  than  of  bonds,  such  stock  being  marketed 
at  a  respectable  percentage  of  its  face  value.  The  result  has 
inevitably  been  that,  with  the  assured  success  of  the  enterprise, 
the  stock  has  risen  far  above  par  instead  merely,  as  when  issued 
as  a  bonus  to  bond  purchasers,  of  rising  towards  par.  The  con- 
sequence has  been  that,  with  prosperous  roads  like  the  Boston 
&  Albany,  frequent  applications  arise  for  right  to  issue  new 
stock  to  keep  pace  with  growing  value  of  the  plant.  And  the 
resultant  anti-stock-watering  agitation  has  kept  the  matter  be- 
fore the  public.  The  focus  of  attention  of  late  years,  however, 
has  shifted  to  the  gas,  electric,  and  street  railway  companies. 
The  most  explicit  statement  of  policy,  crystallized  into  law,  is 
found  in  the  anti-stock-watering  laws  of  1894  and  i8Q6.2 

The  effect  of  the  conservative  policy  in  Massachusetts  ap- 
pears in  the  accompanying  table  representing  the  capital  stock 


PUBLIC-SERVICE   CORPORATIONS  127 

and  funded  debt  of  various  street  railway  companies.  In  no 
type  of  public-service  corporations  have  the  evils  of  over-capi- 
talization been  pushed  to  greater  excess  than  in  the  case  of  this 
class  of  corporations.  Several  causes  seem  to  have  cooperated 
to  bring  about  this  result.  In  almost  all  our  cities,  profits  de- 
pendent upon  gratuitous  franchise  grants  have  almost  in  a  night 
become  so  large  as  to  require  concealment.  Then  again,  the 
progress  of  the  industry  has  been  so  rapid  since  the  first  electric 
street  road  was  operated  in  Richmond,  little  more  than  a  decade 
ago,  that  revolutionary  changes  in  equipment  have  been  neces- 
sary. These,  in  turn,  have  invited  financial  manipulation  at 
each  turn-over  and  replacement,  just  as  we  know  that  dis- 
coveries of  new  means  of  gas  manufacture  have  opened  the 
way  to  inflation.1  And,  finally,  the  rapid  growth  of  urban 
centres  has  in  itself  compelled  a  great  extension  of  track  and 
of  service  leading  to  pooling  and  consolidation,  with  all  their 
attendant  opportunities.  We  may  instance  the  Chicago  street 
railways  as  a  case  in  point,  with  their  more  than  doubled  mile- 
age from  1886  to  1896,  each  mile  of  track  having  increased, 
moreover,  in  average  capitalization  from  566,000  to  $126,000? 

CAPITALIZATION    PER   MILE   OF  TRACK,  1899 

STOCK  AND  ErNDKn  DKBT 
{Street  Railway  Journal,  October, 


London  street  railways         ..........  |>  79,632 

New  York  street  railways     .         .          .          .         .         .         .         .         .         .201,581 

New  York  elevated  railways          .........  662,520 

Chicago  street  railways         ..........  118,334 

Chicago  elevated  railways    ..........  873,231 

I>erlin  street  railways   ...........  74,708 

Brooklyn  street  railways       ..........  119,072 

Philadelphia  street  railways          .........  26^,510 

Liverpool  street  railways       ..........  94,494 

Eastern  Massachusetts  street  railways  ........  61,972 

Huston  street  railways            ..........  100,615 

Glasgow  street  railways         ..........  54,8(>(> 

St.  Louis  street  railways       ..........  306,644 

Cleveland  street  railways      ..........  96,585 


128  TRUSTS,   POOLS  AND   CORPORATIONS 

{Massachusetts  Railroad  Commissioners,  j8gS) 

Massachusetts  street  railways $46,600 

New  England  street  railways  .........  49,500 

New  York  state  street  railways  .........  177,800 

Pennsylvania  street  railways  .........  128,200 

United  States  street  railways 94,ioo 

Great  Britain  street  railways 47,000 

{Eleventh  Report  Statistics  of  Railways'} 

United  States  steam  railroads       .........  $60,000 

New  England  states  steam  railroads     ........  60,000 

Middle  Atlantic  states  steam  railroads 111,000 

Southern  states  steam  railroads 45,000 

Scanning  this  table,  the  relative!}-  low  capitalization  of  the 
Massachusetts  and  New  England  companies  stands  forth  clearly, 
especially  in  contrast  with  those  of  New  York  and  Pennsylvania. 
St.  Louis  heads  the  list,  with  the  extreme  case  of  a  capitalization 
averaging  five  times  that  of  the  steam  railroads  of  the  United 
States.1  Philadelphia  and  New  York  are  not  far  behind  in  this 
regard.2  Nor  can  it  be  admitted  that  the  service  is  less  efficient 
in  Massachusetts  than  in  either  of  the  other  cases.  Even  for 
New  York  state  as  a  whole,  with  a  goodly  proportion  of  sub- 
urban roads,  which,  of  course,  lower  the  average,  the  capitaliza- 
tion is  three  times  that  of  the  steam  roads  of  the  country  at 
large,  and  50  per  cent  greater  than  that  of  the  railroads  in  the 
Middle  Atlantic  states.3  It  is  probable  that  the  average  for 
Massachusetts  and  New  England  is  somewhat  depressed  by  a 
relatively  greater  proportion  of  purely  suburban  lines,  built  at 
minimum  cost.  The  same  factor  of  low  cost  also  explains  in 
some  measure  the  relatively  low  capitalization  of  the  European 
roads.  Many  are  still  operated  by  horse-power  or  by  light 
electric  service,  so  that  comparison  with  our  own  country  is 
largely  vitiated  thereby.' 

1  See  Report  of  the  Missouri  Commissioner  of  Labor,  1896,  for  history  of  this 
company. 

-  See  the  extended  tables  of  financial  characteristics  in  the  Street  Railway  Journal, 
October,  1899,  pp.  680-684.  as  also  the  Report  of  Special  Committee  of  the  New  York 
Assembly  upon  Municipal  Ownership  of  Railroads,  1896. 

3  Cf.  Ri-port  of  the  Massachusetts  Committee  on  Relations  between  Cities  and 
Towns  anil  Street  Railway  companies,  1898,  p.  37. 


PUBLIC-SERVICE    CORPORATIONS 


129 


That  the  policy  of  Massachusetts  in  attempting  to  keep  capi- 
talization down  to  actual  investment  has  been  fairly  successful 
is  attested  also  by  a  second  table,  which  compares  for  Massa- 
chusetts the  sworn  returns  of  cost  with  those  of  capitalization. 

COST   AND   CAPITAL   INVESTMENT   PER   MILE 

{Massachusetts  Railroad  Commissioners, 


CONSTRUCTION.   EQUIPMENT 

REAL 

ESTATE 

TOTAL 

CAPITAL 

Massachusetts, 

1887     .     .     . 

$17,600 

$8,300 

$9,700 

$35,600 

$32,700 

Massachusetts, 

1893     •     •     • 

26,800 

11,700 

I5.500 

54,000 

53,400 

Massachusetts, 

1896    .     .     . 

23,400 

9,800 

12,800 

46,000 

46,400 

West  End  Co., 

1896    .     .     . 

$56,600 

39,800        96,400 

100,700 

Worcester  Co., 

1896    .     .     . 

41,500 

6,500 

48,000 

45,000 

Springfield 

25,000 

8,800 

T,  ^.^OO 

31,000 

Holvoke    . 

23,700 

9,400 

33.0oo 

31,000 
j 

The  agreement  between  the  last  two  columns,  for  a  few  com- 
panies chosen  from  a  long  list,  as  typical  of  varying  conditions 
of  service,  is  as  close  as  need  be.  Discrepancies,  where  they 
occur,  tend  rather  to  excess  of  tangible  assets  over  capital  liabili- 
ties than  the  reverse.1  Assuming  the  maximum  cost  of  a  street 
railway  adapted  for  heavy  service,  and  exclusive  of  real  estate 
holdings,  to  be  not  far  from  $65,000  per  mile,  the  immense  over- 
capitalization of  surface  roads  in  other  parts  of  the  country 
becomes  at  once  apparent. 

The  regulation  of  the  capitalization  of  gas  and  electric  light 
companies  in  Massachusetts  has  not  been  less  effective  in  this 
direction,  dishonorable  exception  being  made  lately  of  the  city 
of  Boston.  Judging  by  the  latest  returns,  the  majority  of  the 
larger  companies  show  a  surplus  of  tangible  assets  over  stock 
and  bonds  of  from  one-third  to  one-half  of  their  total  capital. 
Thus  the  Cambridge  company,  capitalized  at  $700,000,  has  a 
surplus  of  8358,000;  Fall  River,  capitalized  at  $450,000,  sur- 
plus Si6o,ooo;  Lowell,  capital  8500,000,  surplus  8334,000;  and 

1  (Vrtain  cases  occur,  as  of  the  West  End  Companv,  no\v  leased  to  the  Boston 
Elevated  Railroad.  Cf.  Report  Massachusetts  Railroad  Commissioners,  1898,  pp. 
140-155.  The  first  lease  proposition  was  revoked  because  the  capitalization  was 
526,340,000,  while  the  plant  was  worth  hut  S2=;, 600,000. 


130  TRUSTS,    POOLS   AND    CORPORATIONS 

so  on.1  The  old  Boston  Gas  Company,  capitalized  at  $2,50x3,000, 
actually  paid  taxes  upon  $4,129,000,  so  completely  was  it 
swamped  by  a  huge  surplus.2  The  aggregate  balance  sheets 
of  all  companies  in  the  state  in  1899  showed  a  total  capital  of 
$24,878,000,  with  a  surplus  of  assets  over  and  above  this  of 
$8,1 15,000,  upwards  of  a  million  dollars  being  charged  to  reserves 
and  depreciation  at  the  same  time.3  In  fact,  exclusive  of  Bos- 
ton, the  main  problem  for  the  gas  companies  was  as  to  the  proper 
disposition  to  be  made  of  these  surpluses,  as  we  shall  see.  The 
contrast  with  the  situation  in  New  York  is  adequately  illustrated 
by  the  facts  in  that  city  in  1885,  when,  with  a  property  worth 
not  over  $20,000,000,  the  Consolidated  Gas  Company  was  capi- 
talized at  $45,ooo,ooo.4 

Assuming  that  the  conservative  policy  of  strict  limitation  of 
capitalization,  as  exemplified  in  Massachusetts,  is  the  safer  one 
in  the  case  of  public-service  corporations,  we  are  at  once  con- 
fronted by  a  perplexing  question  :  What  should  be  the  standard 
by  which  the  proper  volume  of  stock  and  bonds  is  to  be  meas- 
ured ?  A  number  of  possible  ones  suggest  themselves.  Among 
these,  we  may  profitably  consider,  in  turn  :  first,  the  total  origi- 
nal cost  or  actual  investment  from  the  outset ;  secondly,  the 
reproduction  cost  of  the  plant  under  present  conditions  ;  thirdly, 
the  "structural  value," -  —  value,  that  is  to  say,  for  service  and 
wear,  irrespective  always  of  earning  capacity  ;  and,  in  the  fourth 
place,  market  value,  or  the  price  obtainable  at  open  sale.  To 
show  how  widely  different  these  may  be,  we  may  cite  the  leading 
case  of  the  Interstate  Consolidated  Railroad  Company.5  Operat- 
ing both  in  Rhode  Island  and  Massachusetts,  it  had  obtained  a 
charter  from  the  former  state,  with  the  right  to  issue  stock  and 
bonds  to  the  amount  of  8650,000.  It  then  applied  to  the  Rail- 
road Commission  for  authority  to  issue  this  amount  under  the 

1  From  Investigation  of  Boston  Gas  Companies,  Committee  on  Manufactures, 
March,  1900,  tallies  presenter!  by  G.  YV.  Anderson.  (Pamphlet.) 

-  Supplement  Annalf  f>/  American  Academy  <//"  Political  Science,  May,  1900,  p.  41. 

3  Fifteenth  Report  Gas  and  Klectric  Light  Commissioners,  1900,  p.  97. 

4  Report  Special  Senate  Committee  to  investigate  the  Supply  of  Gas  in  New  York, 
1885,  p.  12. 

6  Report  Massachusetts  Railroad  Commission,  1896,  pp.  165-172. 


PUBLIC-SERVICE    CORPORATIONS  131 

Massachusetts  charter  as  well.  The  original  capitalization  of  a 
defunct  predecessor  had  been  $875,000,  of  which  only  about 
$470,000  represented  the  actual  investment,  the  remainder  being 
water.  Owing  to  the  fall  in  prices  of  electrical  equipment,  it 
was  established  that  the  plant  could  be  duplicated  for  about 
8400,000.  Its  present  structural  value  was  estimated  to  be  not 
over  $255,000,  while  the  price  paid  for  it  at  public  auction  by  its 
then  present  holders  was  $i  52,000.  Excluding  the  possible  basis 
of  capitalization  upon  earning  capacity,  which  ranged  upon  esti- 
mate from  nothing  to  $900,000,  which  of  these  other  standards, 
between  $470,000  and  $152,000,  ought  rightly  to  be  applied  ? 
This  particular  case  happened  to  be  simplified  by  a  late  change 
of  ownership  at  forced  sale,  through  which  the  actual  capital 
invested  in  the  enterprise  by  the  petitioners  was  known.  This 
being  shown,  with  immediate  improvements  projected,  to  amount 
to  $317,197,  the  board  authorized  a  capitalization  of  $317,200  in 
conformity  thereto.  Had  the  case,  as  in  ordinary  practice,  been 
one  of  petition  for  new  capitalization  by  the  original  company, 
the  decision  would  have  been  less  easy. 

It  would  seem  as  if,  in  an  enterprise  still  in  the  hands  of  its 
projectors,  tJic  original  and  total  cost  might  be  a  fair  criterion 
for  capitalization.  Such  would  seem  to  have  been  the  norm 
first  adopted  in  Massachusetts.  "  As  the  established  rule  of 
our  law,  the  capital  stock  of  every  business  corporation  must 
represent  the  cash  actually  contributed  by  its  stockholders, — 
no  more  and  no  less."  !  Or,  quoting  from  a  private  letter  from 
one  of  the  Railroad  commissioners  in  Connecticut,  "  The  capi- 
tal in  an  enterprise  is  the  amount  put  into  it  at  the  time  when 
the  enterprise  was  initiated ;  although  it  would  cost  less  to 
embark  in  the  same  undertaking  to-day."  The  latest  revision 
of  German  company  law  follows  this  policy  also,  in  allowing 
all  property  to  be  taken  at  cost  price,  minus  depreciation,  not- 
withstanding tiie  fact  that  its  actual  value  is  less.2  There  are 
many  valid  objections  to  this  rule.  The  state  cannot  permit 
the  capitalization  of  dishonesty,  of  extravagance,  or  of  incompe- 
tence; nor  can  it  permit  the  burden  of  obsolete  industrial  pro- 


132  TRUSTS,    POOLS   AND   CORPORATIONS 

cesses  or  administration  to  be  laid  upon  future  generations. 
Capital  may  have  been  needlessly  wasted,  as  in  the  case  of 
many  Western  railroads,  through  construction  companies,1  or  as 
in  the  recent  scandalous  electricalization  of  the  Third  Avenue 
Railroad  in  New  York  city.  Legitimate  expenses  of  incorpo- 
ration may  be  very  heavy,  as  in  England ;  or  large  expenditures 
for  entirely  improper  purposes,  as  in  "  kissing  "  bills  through 
legislatures,  may  have  been*  made.  The  money  may  have  been 
actually  expended  by  the  promoters,  as  Jacob  Sharp  undoubt- 
edly paid  many  hundred  thousand  dollars  in  1883  for  the  fran- 
chise of  the  Broadway  Surface  Railroad  Company.2  This 
represents  real  capital  invested.  Had  it  been  legitimately  spent 
in  openly  bidding  for  a  franchise,  its  capitalization  might  have 
ensued  without  question.  Or,  again,  consolidation  of  various 
companies,  necessary  for  unity  and  efficiency  of  service,  may 
perhaps  be  attainable  only  through  purchase  or  control  of  con- 
tributory or  supplemental  systems.  These  are  to  be  had  only 
at  an  exorbitant  price.  Such,  for  example,  has  been  the  case 
in  most  of  our  large  cities,  where  fancy  prices  have  been  paid 
for  local  companies ;  such  prices  being  far  above  any  actual 
franchise  value  based  upon  future  earnings.  An  earnest  advo- 
cate of  street  railway  interests  naively  observes  in  extenuation 
of  the  admitted  fact  of  over-capitalization  that  the  present  high 
valuation  is  probably  not  in  excess  of  the  cost  of  equipment  plus 
the  cost  at  the  present  time  of  purchasing  the  rights  of  way.3 
Such  expenditures  may  be  the  necessary  forerunner  of  success- 
ful operation.  Shall  a  return  upon  them  as  capital  stock  be 
denied  ?  This  cannot  be  done  so  long  as  the  criterion  of  origi- 
nal investment  obtains. 

These  fundamental  objections  against  original  investment  as 

1  The  device  of  the  construction  company  is  still  utilized  for  evasion  of  strict 
capitalization  laws.  Two  companies  have  been  privately  cited  to  me  in  which  the 
actual  cost  of  installation  to  the  construction  companies,  which  were  identical  in 
personnel  with  the  parent  corporation,  were  $62,000  and  $211,000  respectively. 
The  contracts  for  this  work  were  let,  however,  at  $100,000  and  $500,000. 

-  An  excellent  account  is  given  in  Municipal  Affairs,  IV  (1900),  pp.  139  et  set/. 

3  Street  Railway  Journal,  1897,  p.  212.  German  company  law  applies  well  here 
in  prohibiting  the  charge  to  assets  of  any  item  above  cost  price.  Thus,  if  it  cost 
nothing,  it  must  not  be  allowed  to  swell  the  capital  account. 


PUBLIC-SERVICE   CORPORATIONS  133 

a  basis  for  capitalization  have  led  to  general  acceptance  of  the 
cost  of  present  reproduction  in  its  place.  This  is  the  norm 
usually  accepted  by  judicial  appraisers,  as  in  the  recent  case, 
still  pending  in  the  courts,  concerning  purchase  by  the  city  in 
1895  of  the  Nevvburyport  water-works.1  It  seems  to  have  been 
adopted  also  in  appraisal  of  the  Milwaukee  street  railroads  in 
1898  as  well  as  in  Detroit.2  It  is  the  one  recognized  by  the 
Massachusetts  Railroad  commissioners  in  their  regulation  of 
capitalization.3  The  Gas  and  Electric  Light  commissioners  in 
the  same  state  also  adhere  to  it  closely  in  fixing  the  price  of 
product.  This  is  plainly  evidenced  in  the  case  of  the  Brockton 
Gas  Company  in  1895.  The  board  ordered  a  reduction  of  price, 
maintaining  that  the  company  was  justified  in  earning  dividends 
only  upon  the  cost  of  duplicating  the  plant.  In  the  words  of 
the  decision,  "  The  profits  of  companies  supplying  this  kind  of 
public  service  must  compare  favorably  with  those  which  a  new 
company  might  need  to  pay  a  fair  dividend  when  fully  equipped 
to  render  the  same  service."  4  Such  is  the  apparent  intention 
of  the  laws  in  most  states  which  make  any  attempt  at  regula- 
tion of  this  sort.5 

It  is  apparent  at  once  that  this  substitution  of  duplication 
price  for  original  investment  shifts  the  base  entirely;  inasmuch 
as  prime  cost  bears  no  necessary  relation  whatever  to  present 
value,  even  supposing  the  investment  to  have  been  wisely  and 
properly  made.  Recent  as  the  trusts  are,  twenty-four  of  those 
reporting  to  the  Industrial  Commission  state  the  original  cost 
of  their  plants  to  amount  to  73.22  per  cent  of  their  nominal 
capitalization,  while  the  cost  of  reproduction  amounted  to  only 
64.42  per  cent  of  the  same.*3  The  divergence  between  the  two 

1  Bill  of  Complaint,  in  case  of  Newburyport  Wafer  Co.  v.  Newlntryportt  United 
States  Circuit  Court,  District  of  Massachusetts,  Xo.  924,  p.  12.  Also  raised  in  the 
case  of  Mitllin  Bridge  Company,  Pa.  St.  144,  p.  36,  \vher»,  the  bridge  being  swept 
away  while  the  case  was  pending,  the  cost  ot  its  duplication  became  involved. 

-  Street  Railway  Journal,  1898,  p.  397,  and  1899,  P-  4^O. 

:!  Cf.,  for  example,  the  West  Knd  Street  railway  lease  in  Boston.  Massachusetts 
Railroad  Commissioners,  1898,  pp.  140-155. 

4  Eleventh  Annual  Report,  p.  14,  cited  by  ].  11.  Cray  in  Quarterly  Journal  of 
Economics,  XIV,  p.  531. 

6  Cf.  Bulletin  Department  of  Labor,  Xo.  29  1^1900),  p.  670.  °  //•/./'.,  p.  (171. 


134  TRUSTS,   POOLS  AND   CORPORATIONS 

is,  of  course,  most  notable  in  the  case  of  those  businesses  in 
which  methods  and  processes  are  rapidly  changing.  The  elec- 
trical industries,  characterized  by  a  rapid  fall  in  the  costs  of 
equipment  since  1893,  will  serve  as  examples.  Electric  motors, 
costing  perhaps  $2850  in  1891,  may  be  replaced  to-clay  in 
greatly  improved  type  for  perhaps  one-third  of  that  price. 
Instances  may  be  cited  where  the  entire  cost  of  a  suburban 
street  railway  has  decreased  from  $35,500  in  1892  to  $22,600 
per  mile  in  iSgc).1  Equally  great  have  been  the  changes  in  cost 
of  plant  to  the  electric  lighting  companies,  entailing  serious 
problems  of  regulation  of  capitalization  and  of  price  for  the 
Massachusetts  Gas  commissioners.2  The  steady  fall  in  the 
duplication  value  of  these  plants  has,  on  the  strictest  interpre- 
tation of  the  Massachusetts  policy,  amounted  virtually  to  an 
impairment  of  capital,  clue,  however,  to  no  fault  on  the  part  of 
the  companies  themselves.  And  it  has  greatly  hampered  them 
in  the  acquisition  of  new  capital  for  additions  to  the  plant.  The 
public  convenience  in  the  matter  of  extensions  of  electric  light- 
ing must  have  suffered  severely,  had  not  the  companies  been 
allowed  greater  latitude  than  the  original  statutes  apparently 
contemplated  in  this  regard.  As  a  rule,  they  have  been  granted 
time  in  which,  by  retrenchment  and  reduction  of  dividends,  this 
deficiency  may  be  remedied.  On  the  other  hand,  the  move- 
ment of  prices  oftentimes  becomes  of  advantage  to  companies 
desirous  of  swelling  their  capitalization.  Thus  a  street  railway 
equipped  with  steel  rails  during  the  industrial  depression  of 
1893-98  at  822  a  ton  may  now  find  this  portion  of  its  property 
appraisable  at  upwards  of  835  per  ton  or  presently  dropping 
again  to  the  new  price  for  1900  of  826  per  ton.  Here  is  a  dis- 
tinct fluctuation  of  more  than  a  third  in  the  value  of  tangible 
property  upon  which  capitalization  may  be  based,  according  to 
the  law.3  Nor  does  it  seem  to  be  possible  for  the  Railroad  com- 

1  Street  Railway  Journal,  1898,  p.  381,  and  1899,  p.  402. 

-  See,  for  example,  their  Fifteenth  Annual  Report,  1900,  pp.  22,  29,  and  32. 

3  The  analogy  to  the  case  of  a  trust  company  whose  capital  is  invested  in  securi- 
ties of  fluctuating  value  is  close.  Cf.  the  English  case  of  ]'erner  v.  General  and 
Commercial  Investment  Company,  cited  in  Dicksee,  Auditing,  p.  467.  See  also 
Economist,  1900,  p.  147,  and  1890,  p.  1504. 


PUBLIC-SERVICE    CORPORATIONS  135 

missioncrs  to  deny  the  rightfulness  of  such  a  demand.  Cases 
are  on  record,  even,  where  changes  of  price  between  the  time 
of  purchase  of  equipment  and  of  application  for  issues  of  stock 
with  which  to  pay  for  it  have  been  taken  into  account,  so  strictly 
is  the  statute  interpreted.1 

Corroborative  proof  of  the  strictness  of  the  Massachusetts 
policy  is  shown  in  another  way  by  the  table  on  page  129. 
Comparing  the  returns  as  to  tangible  assets  for  Massachusetts 
as  a  whole,  year  by  year,  a  steady  increase  in  valuation  is  shown 
from  1887  to  1893,  while  thereafter  an  equally  noticeable  decline 
is  apparent.  The  cause  of  this  is  obvious.  The  year  1887 
marks  the  early  stage  of  electrical  operation,  with  a  low  average 
due  to  the  inclusion  of  many  horse  roads  and  a  light  electrical 
equipment  at  best.  Down  to  1893  a  phenomenal  development 
of  electricalization  ensued,  with  high  prices,  due  both  to  great 
demand  and  to  costly  and  cumbrous  modes  of  manufacture. 
Since  1893  the  effects  of  industrial  depression  upon  prices,  the 
satiation  of  the  demand  for  electrical  transformation,  and  a 
notable  economy  in  manufacturing  processes  have  all  combined 
to  reduce  the  expenses  of  construction  and  equipment.  Note, 
then,  the  close  correspondence  between  this  phenomenon  and 
the  average  capitalization,  as  shown  in  the  last  column.  The 
notable  decrease  is  not  due  to  the  expulsion  of  water,  but  merely 
to  a  required  conformity  of  capitalization  to  value.  Such  a 
showing,  it  is  believed,  would  be  impossible  under  the  laws  of 
most  of  our  commonwealths. 

Peculiar  difficulty  is  presented  in  the  case  of  systems  trans- 
formed from  horse  to  electric  motive  power.  Almost  none  of 
the  public-service  corporations,  until  recent  years,  seem  to  have 
written  off  any  annual  amount  for  depreciation.  Mere  mainte- 
nance, entirely  distinct  from  depreciation,  has  generally,  though 
not  always,  been  provided  for  out  of  current  revenue  ;  but  nothing 
further  has  been  covered.  As  a  result,  the  suddenly  imposed 
necessity  of  entirely  transforming  the  old  plant  into  scrap,  and 

1  In  Connecticut,  where  greater  reliance  upon  original  investment,  seems  to  be 
placed  tlian  in  Massachusetts,  the  only  case  where  cost  of  reproduction  is  taken  into 
consideration  is  in  case  of  petition  t»r  an  issue  of  Ivrnds.  which  under  the  law  mast 
never  exceed  one-halt  the  cost  ot  construction  and  equipment. 


136  TRUSTS,   POOLS  AND   CORPORATIONS 

equipping  the  system  anew,  offered  a  great  opportunity  to  the 
capitalist.  To  the  original  capital,  now  extinct  as  far  as  tangible 
plant  is  concerned,  could  be  added  the  entire  cost  of  electricali- 
zation.  Such  was,  indeed,  the  common  practice;  and  much  of 
the  flagrant  over-capitalization  of  street  railways  can  be  ascribed 
to  this  fact.  On  any  theory  of  original  investment  as  a  base  of 
capital,  it  is  at  first  sight  not  easy  to  contest  the  policy.1 

The  leading  case  of  the  so-called  "  Milwaukee  four-cent  fare  " 
decision  raised  this  issue.2  The  constitutionality  of  an  ordi- 
nance reducing  fares  from  five  to  four  cents  was  in  question, 
under  the  Fourteenth  Amendment  to  the  Constitution  ;  and  the 
court  was  called  upon  to  decide  as  to  the  real  value  of  the  plant 
of  the  street  railway  company,  irrespective  of  its  fictitious  cap- 
italization of  $15,000,000.  Counsel  for  the  city  contended  that 
the  cost  of  reproduction  at  present  prices,  not  the  original  in- 
vestment, should  be  considered  as  a  dividend  base.  To  this 
objection  was  properly  made  that  to  disallow  all  costs  of  original 
installation,  forcing  thereby  capital  to  attend  upon  industrial  and 
price  stability,  would  be  to  put  a  severe  penalty  upon  enterprise. 
And  in  this  particular  case,  to  the  reproduction  value  of  the 
plant  of  $5,000,000  was  allowed  an  addition  of  $2,000,000  for 
"costs  of  pioneering."  Adding  to  this  the  capitalization  of  the 
surplus  earnings  as  a  measure  of  the  purchase  value,  decision 
was  rendered  that  a  four-cent  fare  yielded  an  inadequate  return  ; 
and  the  ordinance  thereupon  was  set  aside. 

The  practical  rule  of  appraisal  generally  adopted  is,  as  we 
have  said,  to  estimate  the  value  according  to  cost  of  reproduc- 
tion. From  this,  however,  in  order  to  determine  the  structural 
value,  —  that  is  to  say,  the  "fair  value  for  the  purposes  of  its 
use,"  —  an  allowance  for  depreciation  must  be  made.3  This 

1  Cf.  Report  of  Bureau  of  Labor  Statistics,  Illinois,  1896,  p.  54,  on  Chicago  experi- 
ence; as  also  Xe\v  York  Report  on  Municipal  Ownership  of  Railroads,  1896,  pp.  1851 
and  1865. 

2  Street  Railway.  Journal,  1898,  p.  397.     Cf.  also  Municipal  Affairs,  IV  (1900), 
p.  212. 

3  Consult  E.  Mathieson,  The  Depreciation  of  Factories,  third   edition,  London, 
1893;    and   L.   R.  Dicksee,  Auditing,  third  edition,  London.      The   Massachusetts 
Municipal   Ownership  Act  requires  depreciation  to  be  charged  off  at  5  per  cent 
annually. 


PUBLIC-SERVICE   CORPORATIONS  137 

must  be  sharply  distinguished  from  allowance  for  expenses  of 
maintenance,  —  a  distinction  often  lost  sight  of  in  practice. 
Depreciation  is  entirely  different  from  loss  through  "  wear  and 
tear."  No  matter  how  thoroughly  in  repair  a  plant  may  be 
kept,  under  modern  industrial  conditions  it  is  bound  to  require 
entire  reconstruction  within  a  calculable  time.  This  time  may 
vary  from  a  very  few  years  in  the  case  of  gas  retorts,  through 
ten  or  a  dozen  for  street  railway  road-bed,  and  up  to  fifty  years 
for  buildings  and  permanent  structures.  The  necessity  of  ulti- 
mate reconstruction  or  replacement  is  the  same  in  any  case. 

The  English  courts  have  never  recognized  the  economic  law 
that  capital  must  ultimately  be  replaced  from  profits.1  Not 
until  1878  was  the  principle  recognized  in  the  assessment  of  the 
English  income  tax.  Prior  to  that  time  the  only  deduction  from 
gross  income  allowed  was  the  average  actual  expenditure  for 
repairs.  A  test  case  then  showed  the  necessity  of  an  additional 
"just  and  reasonable  deduction"  for  depreciation.  The  gas 
companies  in  this  country  seem  to  have  had  the  facts  of  de- 
preciation, as  distinct  from  maintenance  expenses,  impressed 
upon  them  by  long  experience  ;  although  in  Massachusetts  a 
plethora  of  reserve  funds  has  been  the  rule  by  reason  of  the 
strict  regulation  of  stock  issues.  From  the  statements  of  twelve 
of  the  largest  gas-works  in  the  United  States,  the  charge  to 
depreciation  far  outweighs  that  for  maintenance  and  repairs.2 
On  the  other  hand,  it  may  be  stated  with  certainty  that  until 
1895  almost  none  of  the  electric  surface  roads  set  off  any  pro- 
portion of  profits  for  this  purpose.3  The  necessity  for  such  a 
charge  to  "  deferred  operating  expenses  "  formed  an  interesting 
element  in  the  Milwaukee  four-cent  fare  decision  above  men- 

1  Cf.  article  Capital  in  Falgrave's  Dictionary  of  Political  Economy.     Many  addi- 


tional cases  will  be  found  ii 

-  Fourteenth    Report  Ui 

excellent    paper    on    Depre 


Dicksee's  Auditing. 

ted  States  Department  of  Labor,  iSog.  p.  387.     Cf.  the 
ciation    in    (las    Works,   bv   II.   S.  Chase,  in   'Jlie  J'ul'/ic 


;i  Ninth    Report    Bureau    ol    Labor, 
/!>«;•;/<//,  I  Sou,  p.  403.     Coi  suit  How   to  determine   the  True   Net  Laming  Po\ 
Street   Raihvav  1'n 


138  TRUSTS,    POOLS   AND    CORPORATIONS 

tioned.1  It  appeared  that  the  company  until  1896  had  made  no 
deduction  from  gross  income  for  depreciation  of  the  plant.  The 
city,  therefore,  seeking  to  establish  the  fact  of  exorbitant  earn- 
ings at  the  former  five-cent  rate,  sought  to  compel  estimation  of 
these  net  earnings  strictly  according  to  the  company's  books. 
The  court,  however,  was  constrained  to  admit  the  patent  fact  of 
depreciation,  despite  the  absence  of  any  writing-off  for  this  pur- 
pose by  the  company ;  and  it  was  allowed  that  operating  ex- 
penses ought  really  to  have  been  a  quarter  more  than  they  had 
been  made  to  appear.2  Since  this  time  the  almost  universal 
foreign  practice  of  creating  a  special  depreciation  fund  or  of  carry- 
ing reserve  or  suspense  accounts,  has  been  generally  adopted. 

It  is  difficult  to  excuse  this  haphazard  sort  of  finance  on  the 
part  of  American  street  railways.  Even  in  Massachusetts  they 
have  gone  bravely  on,  reporting  a  steady  decrease  in  the  pro- 
portion of  operating  expenses  to  gross  income, — from  upwards 
of  8 1  per  cent  in  1888  to  68.2  per  cent  in  i8gc).3  With  sounder 
financial  methods,  this  proportion  of  operating  expenses  to  gross 
income,  perhaps,  ought  to  be  now  appreciably  higher.  Failure 
in  earlier  days  to  reckon  with  this  factor  is  probably  due  to  imi- 
tation of  the  financial  methods  of  the  steam  roads.  So  long 
have  these  been  in  operation  that  American  experience  has 
accurately  distributed  the  proper  annual  expenditure  for  repairs, 
maintenance,  and  reconstruction,  necessary  to  perpetuate  the 
plant  in  full  efficiency  upon  a  cost  of  reproduction  basis.  On 
European  roads  the  accounts  are  differently  kept.  Betterment 
through  reconstruction  is  more  commonly  charged  to  fresh  capi- 
tal account  rather  than  to  current  operating  expenses.  Yet  the 
practice  of  keeping  distinct  accounts  with  depreciation  is  said  to 
be  general. 

1  Supra,  p.  123. 

2  The   Milwaukee  company's  accounts  are   now  models  in   this   respect.     Street 
Raihvay  Journal,  1899,  pp.  351    and   369.     The   experience  of  the   West   Knd   rail- 
way ( Boston)  is  a  case  in  point.     Within  six  years  after  the  installation  of  an  entirely 
new  nine  thousand    horse-power  electric  plant,  the  entire  station   \vas  remodelled 
at  an  expense   of  $500,000,   merely  to  substitute    direct    driving   engines  for  power 
transmission  by  belts. 

3  Report  Massachusetts   Railroad   Commission,    1900,  p.   75.     Cf.   Street  A'ailn'ay 
Journal,  1897,  p.  214,  commenting  upon  this. 


PUBLIC-SERVICE    CORPORATIONS  139 

Thus  far -we  have  spoken  of  depreciation  as  applied  to  dete- 
rioration or  supersession  of  physical  plant.  Depreciation,  or 
rather  perhaps  amortization,  as  it  might  more  properly  be  called, 
clue  to  a  limited  franchise  life,  is  of  a  different  sort.  The  Massa- 
chusetts policy,  however,  not  permitting  the  capitalization  to 
include  any  franchise  valuation,  avoids  this  difficulty  altogether. 

We  may  dismiss  the  final  criterion  of  capitalization,  according 
to  market  ralnc,  with  a  few  words.  In  the  first  place,  such  mar- 
ket price  bears  no  relation  to  the  value  of  the  plant  "  for  the 
purposes  of  its  use,"  so  long  as  it  is  in  successful  operation. 
And,  even  in  those  cases  where  subsequent  sale  may  have  been 
contemplated,  such  a  sale,  in  absence  of  a  continuous  open  mar- 
ket, might  take  place  at  an  absurdly  low  figure  under  pressure. 
Thus  the  Massachusetts  Railroad  commissioners  refused  in  the 
case  of  the  Interstate  Railroad  Company,  above  mentioned,  to 
consider  the  auction  price  as  any  fair  criterion  even  of  structural 
value.  And,  on  the  other  hand,  such  market  price,  if  it  be  com- 
puted upon  the  price  of  securities,  can  never  make  distinction 
between  the  value  of  the  plant  and  the  worth  of  the  franchise. 
This,  in  Massachusetts  at  least,  where  no  value  in  the  franchise 
is  ever  allowed  to  enter  into  capitalization,  means  that  the  fran- 
chise rights  merely  enhance  the  market  price  of  the  existing 
issues  based  upon  real  property.  To  allow  this  market  price  of 
securities  to  enter,  even  remotely,  into  any  calculation  of  prop- 
erty value,  would  obviously  be  to  overset  the  restrictive  policy 
entirely. 

The  problem  of  legally  restricting  the  capitalization  of  an  old- 
established  corporation  is  essentially  different  from  that  of  con- 
trolling the  organization  of  a  new  one.  In  order  to  elucidate 
this,  we  must  consider  separately  some  of  the  means  by  which 
the  volume  of  corporate  securities  is  increased  during  the  life  of 
the  companies.  Probably  the  commonest  of  these  is  by  the 
payment  to  shareholders  of  so-called  stock  dividends.  These 
consist  either  of  an  outright  bonus  of  new  shares  of  stock  or 
bonds  ;  or,  in  a  mitigated  form,  as  stock  sold  below  par  or  at  less 
than  market  quotations.  Such  "melon-cutting,"  in  the  parlance 
of  Wall  street,  may  range  as  high  as  100  per  cent,  as  in 
the  Adams  Express  Company  dividend  of  1898.  The  notable 


HO  TRUSTS,   POOLS  AND   CORPORATIONS 

Boston  &  Albany  distribution  of  state  stock  in  1882  .is  a  familiar 
example.  This  crudest  form  of  inflation  of  capital,  whether  up  to 
or  beyond  the  increasing  value  of  the  plant,  is  the  easiest  to 
control  directly.  And  statutory  prohibition  of  the  issuance  of 
stock  at  other  than  a  price  fixed  at  public  sale  would  seem  to  be 
easily  enforceable. 

Another  somewhat  more  subtle  mode  of  accommodation  of 
capitalization  to  enhanced  revenue  potential,  since  it  may  not 
really  augment  the  volume  of  securities  outstanding,  is  to  sub- 
stitute stock  issues  for  funded  debt.  The  tendency  in  this 
direction  seems  to  be  very  marked  at  the  present  time  among 
the  strongest  of  the  American  railroads,  such  as  the  New  York 
Central,  the  Pennsylvania,  the  Cential  of  New  Jersey,  New 
York,  New  Haven  &  Hartford,  and  others.1  In  some  of  these, 
outside  of  Massachusetts,  the  primary  motive  would  seem  to  be 
to  take  advantage  of  rights  to  issue  securities  at  par,  where  mar- 
ket value  is  high.  But  in  addition  there  would  seem  to  be  the 
advantage  of  great  elasticity  in  future  dividend  possibilities, 
within  the  same  limits  of  total  capitalization.  Thus  a  substitu- 
tion of  possible  8  per  cent  stock  for  present  4  per  cent  bonds 
clearly  permits  of  the  absorption  of  greater  earnings  to  be 
derived  in  future.  The  advantages  of  stock  issues  over  bonds 
in  the  way  of  elasticity  downward,  is,  of  course,  always  to  be 
added ;  as  they  permit  of  a  cessation  of  dividend  burdens  during 
periods  of  depression.  Probably  for  this  reason  the  tendency  of 
most  reorganization  schemes  seems  to  have  been  in  the  direction 
of  retirement  of  bonds  in  favor  of  stocks.  This  mode  of  substi- 
tution is,  however,  clearly  confined  to  those  companies  whose 
finances  are  in  such  excellent  condition  that  their  stocks  will  sell 
above  par.  To  substitute  stocks,  which  can  only  be  placed  on 
the  market  at  ruinous  discounts  from  par  value,  for  bonds,  — 
which,  being  well  secured  legally,  are  quoted  much  higher, 
—  would  seem  to  be  bad  finance.  Ability  to  increase  capitaliza- 
tion by  stock  issues  to  advantage  may  in  general  be  taken  as 
evidence  of  prosperity.  The  only  efficient  safeguard  for  public 


PUBLIC-SERVICE   CORPORATIONS  141 

interests  in  such  cases  would  seem  to  be  through  the  right  of 
approval  exercised  by  an  able  administrative  commission,  where 
consent  should  be  required  prior  to  all  such  substitutions. 

The  gradual  accumulation  of  a  surplus,  either  by  good  man- 
agement or  by  exceptional  opportunities,  followed  by  a  petition 
for  its  capitalization  into  stocks  or  bonds,  constitutes  one  of  the 
most  troublesome  problems  in  any  attempt  at  strict  regulation. 
For,  as  will  readily  be  observed,  in  so  far  as  such  a  surplus  — 
either  in  the  form  of  cash,  of  securities  of  other  companies,  or  of 
additions  to  the  original  plant  —  represents  augmented  invest- 
ment, it  would  seem  to  offer  a  proper  basis  for  addition  to 
capitalization.  It  cannot  be  denied  that  in  this  case  the  property 
has  enhanced  in  value.  Unfortunately  for  the  company,  how- 
ever, a  surplus  stands  too  often  in  the  public  eye  as  witness 
to  abnormal  and  undeserved  earnings  in  the  past.  In  those 
commonwealths  which  once  provided  in  their  early  railroad 
charters  for  escheat  to  the  state  of  all  earnings  in  excess  of 
a  certain  amount,  usually  10  per  cent;  or  those,  like  Massachu- 
setts, which  under  the  recent  law  of  1898  provide  for  a  special 
tax  upon  dividends  of  street  railways  in  excess  of  8  per  cent, 
such  a  surplus  may  denote  an  actual  evasion  of  legal  liabilities.1 
To  permit  such  deductions  from  dividends  in  earlier  years  to  be 
capitalized  at  a  later  date  would  seem  to  be,  indeed,  a  flagrant 
subversion  of  public  policy.  On  the  other  hand,  in  many  cases 
the  surplus  may  not  represent  undeserved  earnings  or  concealed 
profits.  It  may  be  due  to  enhanced  values  in  right  of  way,  or 
in  investments,  whether  of  real  estate  or  in  securities  of  other 
companies  ;  thus  in  no  wise  indicating  an  excessive  burden  upon 
the  consuming  public.  Even  more  difficult  of  just  determina- 
tion, such  surplus  may  be  entirely  due  to  exceptionably  able 
business  management  by  which,  even  with  low  rates  to  the 
public,  economy  has  come  to  its  deserved  fruition.  To  deny  the 
right  to  capitalize  such  accumulated  earnings  is  to  penalize 
enterprise  and  to  discourage  economy  ;  neither  of  which,  cer- 
tainly, is  consonant  with  wise  public  policy. 

As    illustrative   of    the    difficulties    presented    by  the    above- 


142  TRUSTS,   POOLS   AND    CORPORATIONS 

described  situation,  we  may  instance  the  recent  case  of  the 
Haverhill  Gas  Company  in  Massachusetts.  The  capitalization 
of  this  company  —  originally,  in  1871,  fixed  at  $75,000  —  was 
not  increased  through  years  of  prosperity,  until  a  surplus 
amounting  to  nearly  $300,000  had  been  accumulated.  This 
existed,  not  as  cash  or  securities,  but  in  the  form  of  plant ;  that 
is,  in  new  buildings,  enlarged  retorts  and  reservoirs,  extensions 
of  mains,  and  the  like.  The  surplus,  moreover,  far  from  being 
the  result  of  extortionate  rates  for  gas,  was  largely  due  to  excep- 
tional management.  This  point  must  be  strongly  emphasized; 
for  it  constitutes  the  novel  element  in  the  case.  For  years  the 
rate  of  $i  or  $1.10  per  thousand  cubic  feet  had  prevailed,  —  a 
rate  recently  obtainable  only  in  the  metropolitan  centre  of  Boston, 
and  appreciably  below  that  customary  in  other  neighboring  cities 
of  equal  size.  The  situation  was  complicated  by  the  attempt  of 
certain  foreign  capitalists  to  water  its  stock  through  a  lease  to  a 
finance  company.  With  this  phase  of  the  matter  we  shall  have 
to  do  later.  For  the  moment  we  have  to  discuss  merely  the 
justice  of  allowing  the  company  directly  to  realize  some  return 
upon  these  accumulated  earnings,  through  an  increase  of  its 
capitalization,  up  to  the  structural  value  of  the  plant.  The  Gas 
commissioners  ordered  the  price  of  gas  reduced  to  So  cents, 
upon  petition  of  the  mayor  and  others,  who  asked  that  it  be 
fixed  at  70  cents.  This  figure,  it  was  estimated,  would  enable 
the  company  to  pay  8  per  cent  dividends  upon  its  original 
capital,  carrying  nothing  further  to  surplus.  Similar  standards, 
according  to  the  showing  of  the  petitioners  for  reduction,  would 
give  prices  per  thousand  in  other  cities  as  follows:  Cambridge, 
$1.02;  Fall  River,  94  cents;  Lowell,  87  cents;  Springfield, 
$  i. 08  ;  and  Worcester,  91  cents.1  All  of  these,  as  will  be  noted, 
are  very  much  above  the  Haverhill  rate. 

The  argument  of  the  advocate  of  restriction  is  to  the  effect 
that,  even  granting  the  surplus  to  be  a  reward  of  economy  and 
efficient  management,  and  not  of  extortion,  this  surplus  belongs 
to  the  public.  It  should  be  regarded  merely  as  a  deferred  divi- 
dend, which  reaches  the  people  in  instalments,  through  the  low 

1  Investigation  of  Boston  Gas  Companies  Committee  on  Manufactures.  March, 
1900,  tables  presented  by  G.  \V.  Anderson,  p.  10.  (Pamphlet.) 


PUBLIC-SERVICE    CORPORATIONS  143 

price  of  gas  which  the  greatly  improved  plant  makes  possible ; 
in  other  words,  that  municipal  ownership  of  the  plant  has  really 
ensued,  leaving  it  to  be  operated,  however,  by  a  private  company 
for  the  fixed  rental  of  8  per  cent.  To  this  contention,  answer 
is  made  that  the  argument  fails,  both  theoretically  and  practi- 
cally. From  the  former  point  of  view  alone,  it  is  defective,  in 
that  it  strikes  at  the  root  of  all  enterprise.  It  confounds  this 
present  case  with  those  in  which  the  surplus  is  a  result  of 
exorbitant  charges  or  of  deficient  service.  Its  effect  would 
inevitably  be  to  give  support  to  mediocrity  of  management 
alone.  It  is  absolutely  at  variance  with  the  theory  that  profits 
form  no  part  of  price.  For  although  no  direct  condition  of 
competition  of  plants  may  exist,  there  being  municipal  monop- 
oly ;  yet,  the  purview  of  the  public  being  made  state-wide 
through  public  reports,  competitive  price  conditions  prevail, 
nevertheless.  All  reward  beyond  the  normal  return  upon  in- 
vestment being  denied  to  extraordinary  economy  and  ability,  no 
incentive  to  improvement  of  service  would  longer  exist.  Such 
extensions  and  improvements  must,  however,  continually  be 
made  in  the  interest  of  the  public.  And  herein  the  practical 
weakness  of  too  restrictive  a  programme  appears.  Denied  the 
incentive  to  accumulation  of  surplus  through  economy,  —  that 
is  to  say,  discouraged  from  making  additions  to  the  plant  neces- 
sary for  improved  service  out  of  operating  expenses,  —  the  way 
is  always  open  to  acquire  new  capital  for  the  same  purpose,  by 
an  increased  issue  of  stock  or  bonds.  Is  it  not  better  that  this 
new  capital  should  be  produced  from  within,  allowing  the  com- 
pany some  participation  in  the  profits  through  a  moderate 
capitalization  of  its  surplus,  rather  than  that  all  expenditure  for 
improvement  should  come  from  without,  thereby  saddling  upon 
the  consumers  the  additional  interest  or  dividend  charges  ?  A 
tardy  recognition  of  the  cogency  of  this  argument  would  seem 
to  appear  in  the  refusal  of  the  Commission  to  order  a  reduction 
of  the  price  of  gas  in  Lynn  to  a  strictly  minimum  profits  level.1 
Whether  similar  reasoning  in  the  parallel  Ilaverhill  case  would 
have  been  followed,  could  the  infamous  stock-jobbing  element 
have  been  eliminated,  must  remain  in  doubt. 

1  Decision  rendered  May  15,  1900.      House  Document  No.  1351. 


144  TRUSTS,    POOLS   AND   CORPORATIONS 

Next  in  importance  to  the  conversion  of  a  surplus  into  stock 
as  a  means  of  increasing  capitalization  is  the  expedient  of  fund- 
ing contingent  liabilities  or  a  floating  debt.  These  may  exist 
in  any  of  their  common  forms,  as  loans,  bills  payable,  credited 
vouchers  and  accounts,  wages  and  salaries  due,  or  even  in  the 
mixed  status  of  receiver's  certificates.  Such  debts  are  generally 
indicative  of  reckless  financiering.  They  may  sometimes  be  nec- 
essary to  the  conduct  of  a  growing  business.  Nevertheless,  an 
abnormally  large  proportion  of  current  liabilities,  as  a  rule,  is 
an  unfavorable  symptom.  It  implies,  as  in  the  familiar  examples 
of  the  Erie  and  the  Union  Pacific  railroads,  an  inability  to  raise 
additional  capital  as  needed,  by  the  sale  of  bonds.  Such  a  con- 
dition is  usually  the  accompaniment  of  a  deficiency  of  current 
income,  whereby  maintenance  has  to  be  met  in  part  by  a  charge 
to  capital  account ;  or,  as  in  the  sudden  appearance  of  a  gigantic 
floating  debt  of  $12,000,000  in  the  case  of  the  Third  Avenue 
railroad  in  New  York  city,  it  may  be  a  result  of  corruption  or 
political  "bleeding."  But,  on  the  other  hand,  the  creation  of 
such  a  floating  debt  may  sometimes  serve  as  a  means  to  the 
enlargement  of  capitalization.  This  would  seem  to  have  been 
the  case  of  late  with  public-service  corporations  in  Massachusetts, 
particularly  the  electric  light  and  power  companies.  Denied  the 
expedient  of  surplus  conversion  into  stock,  both  by  the  public 
policy  already  discussed  and  by  the  great  depreciation  in  the  cost 
of  equipment,  recourse  has  most  naturally  been  made  to  the 
opposite  expedient.  Almost  ten  years  ago l  the  Gas  commis- 
sioners called  attention  to  the  desire  on  the  part  of  companies 
managed  by  "  men  of  a  speculative  turn  of  mind  "  to  cover  all 
expenditure  for  construction  by  issues  of  interest-bearing  scrip. 
A  striking  example  of  such  financiering  occurred  in  1894,  in  the 
attempt  of  the  Boston  Electric  Light  Company  to  fund  some 
$240,000  of  floating  indebtedness.2  It  appeared  that  the  tan- 
gible assets  were  not  equal  to  the  capitalization,  presumably 
because  too  large  a  proportion  of  earnings  had  been  distributed 
as  dividends,  leaving  too  little  for  maintenance  of  the  plant  and 
writing  off  for  depreciation.  "  Floating  debt,  representing  the 

1  Sixth  Annual  Report,  1901,  p.  34. 

-  Tenth  Annual  Report  of  the  Gas  Commission,  1895,  p.  42. 


PUBLIC-SERVICE   CORPORATIONS  145 

cost  of  new  plant  needed  to  take  the  place  of  that  which  had 
been  worn  out  and  useless,  is  essentially  a  part  of  the  expense  of 
carrying  on  the  business,  and  should  be  provided  for,  if  possible, 
out  of  the  earnings.  Capital  stock  has  no  claims  upon  the  earn- 
ings precedent  to  those  of  creditors,  and  not  to  be  governed  by 
this  fact  is  to  endanger  the  well-being  of  the  stock  itself."  1  Over- 
sight of  the  finances  of  each  company  year  by  year,  especially 
in  this  matter  of  the  proportion  of  current  income  applied  to  bet- 
terment, particularly  in  a  field  where  falling  costs  of  reproduction 
prevail,  seems  to  be  an  essential  part  of  any  effective  scheme. - 

The  consolidation  of  companies  offers  a  convenient  mode  of 
surreptitiously  adding  to  capitalization.  This  may  take  place 
in  any  one  of  three  ways.  In  the  first  place,  the  merger  may 
lead  to  reconstruction  or  replacement  of  operating  plant,  with 
its  attendant  devices  of  betterment  entirely  defrayed  by  means 
of  new  stock  issues.  This  has  already  been  described.  Less 
common  is  the  second  method.  This  consists  in  gerrymandering 
the  constituent  companies,  so  that  those  strong  ones  oppressed 
with  surplus  earnings  may  have  aggregated  about  them  the 
roads  which  are  less  favorably  situated.  The  claim  is  openly 
made3  that  the  Massachusetts  Electric  Companies,  composed  of 
forty  odd  suburban  traction  lines,  is  having  its  membership  so 
distributed  in  three  main  groups,  each  to  be  separately  operated, 
as  to  effect  this  end.  Thus  the  Lynn  and  Boston  road,  earning 
perhaps  twice  its  legally  allowed  dividend  of  8  per  cent,  is  made 
to  average  up  its  earnings  with  a  number  of  small  roads  which 
are  scarcely  meeting  operating  expenses.  The  result  is  a  6  per 
cent  dividend  upon  their  united  capital,  with  a  net  yield  to 
shareholders  far  in  excess  of  that  contemplated  under  the  law 
of  1898.  The  third  stock-watering  device  attendant  upon  con- 
solidation consists  merely  in  the  substitution  of  a  high-grade  for 
a  low-grade  security.  For  example,  a  weak  company,  whose 

1  Similar  and  more  recent  cases  occurred  in  Maiden  and  Waltliam  respectively. 
Fifteenth  Annual  Report  (la-;  commissioners,  1000,  pp.  22  and  30. 

-  A  case  lias  been  privately  cited  to  me,  where  a  street  railway  companv,  wishing  to 
make  a  favorable  exhibit  of  earnings,  tore  up  its  recently  laid  rails,  providing  lor  new 
ones  by  issue  of  stock;  and  then  credited  the  large  proceeds  from  sale  of  old  equip- 
ment to  current  revenue. 

3  Street  Railway  Items,  Boston,  Oct.   i.  KJOO. 


146  TRUSTS,    POOLS  AND   CORPORATIONS 

stock  is  quoted  at  50,  is  merged  in  a.  second  operating  corpora- 
tion, with  stock,  bid,  we  will  say,  at  200.  This  latter  company 
issues  new  stock  worth  $200,  share  for  share,  in  exchange  for 
the  $50  stock,  which  is  thereupon  cancelled.  The  legality  of 
such  operations  under  Massachusetts  law  is  open  to  question. 
But  they  would  seem  to  have  been  not  infrequently  undertaken 
in  recent  years. 

The  final  method  of  evasion  of  anti-stock-watering  statutes  is 
found  in  the  creation  of  independent  finance  corporations,  to 
which  the  operating  company  may  be  leased,  sold,  or  trusteed. 
The  practice  may  best  be  made  clear  by  a  few  examples.  In 
1893  the  Brooklyn  City  Railroad  Company,  operating  with  horse- 
power, was  capitalized  at  $6,000,000.  At  that  time  its  power 
was  transformed  to  electricity;  and,  as  has  been  customary  in 
such  cases,  the  opportunity  was  seized  for  an  increase  of  stock 
and  bonds  to  $18,000,000.  Simultaneously  the  road  was  leased 
to  the  Brooklyn  Heights  Railroad  Company,  a  tiny  corporation 
operating  only  a  mile  of  track  and  capitalized  at  $200,000.  This 
company  agreed  to  meet  interest  charges  upon  $6,000,000  of 
bonds  and  to  pay  10  per  cent  upon  the  $12,000,000  of  stock  of 
the  leased  company.  Finally,  in  the  same  year,  the  Long  Island 
Traction  Company,  incorporated  under  the  laws  of  West  Vir- 
ginia with  $30,000,000  capital,  purchased  the  stock  of  the  inter- 
mediary,—  the  Brooklyn  Heights  Company,  —  in  order  to  absorb 
such  surplus  revenue  as  might  remain  over  and  above  its  obliga- 
tions to  the  primary  and  sole  operating  concern.  Thus  was  a 
fivefold  increase  of  capitalization  up  to  the  desired  figure  finally 
effected.1 

The  creation  of  such  finance  companies  has  not  until  recently 
occasioned  much  difficulty  under  the  strict  prohibitions  of  Mas- 
sachusetts law.  The  Light,  Heat,  and  Power  corporation,  or- 
ganized under  the  laws  of  West  Virginia,  has  been  attempting 
since  1898  to  operate  the  electric  plants  in  Mil  ford  and  Clinton, 
for  example.2  It  would  seem,  however,  that  —  legal  quibbles 
aside  —  a  clear  case  of  violation  of  the  statutes  could  be  estab- 


PUBLIC-SERVICE    CORPORATIONS  147 

lished.  Far  more  serious  is  the  expedient  adopted  by  the 
Haverhill  Gas  Securities  Company.1  This  finance  concern,  by 
incorporating  under  the  laws  of  Massachusetts,  evaded  the  pro- 
visions of  the  law  of  1894,  which  declared  invalid  alone  all 
leases  of  a  domestic  to  a  foreign  corporation.  The  new  com- 
pany issued  stock  to  the  amount  of  $500,000,  in  payment  to  the 
owners  of  the  gas  company  for  their  original  capital  of  $75,000 
and  their  accumulated  surplus  of  about  $300,000.  The  money 
necessary  for  formal  compliance  with  the  Massachusetts  law 
requiring  all  stock  issues  to  be  paid  up  in  full  was  temporarily 
advanced  by  the  promoters,  and  paid  over  to  the  owners  of  the 
gas  company  in  exchange  for  their  property.  The  next  step 
was  to  issue  and  sell  5  per  cent  debentures  to  the  amount  of 
$500,000  to  recoup  themselves  for  their  advance,  depositing  the 
original  stock  of  the  gas-light  company  with  a  trustee  as  col- 
lateral. Thus  the  bondholders  of  the  Securities  Company  vir- 
tually paid  for  the  gas  works ;  while  the  control  of  its  business 
remained  in  the  promoters'  hands,  they  retaining  the  Securities 
Company's  stock  of  8500,000  as  their  share  of  the  proceeds. 
As  a  net  result,  then,  we  find  the  capitalization  of  the  operating 
plant,  upon  which  the  public  are  to  pay  charges,  advanced  from 
$75, coo  to  81,000,000.  Only  two  remedies  were  open.  One 
was  to  annul  the  charter  of  the  finance  company  ;  the  other  was 
to  reduce  the  price  of  gas.  This  latter  course  was  the  one 
adopted  by  the  Commission,  as  we  have  seen,  they  recommend- 
ing, also,  that  the  legislature  dissolve  the  company's  corporate 
existence. 

Still  a  third  similar  mode  of  evasion,  in  addition  to  leases  to 
foreign  or  domestic  finance  companies,  is  being  tried  in  Massa- 
chusetts. This  is  to  avoid  the  corporation  laws  altogether,  by 
leasing  the  operating  companies  to  mere  business  associations. 
These  are,  in  practice,  nothing  more  nor  less  than  partnerships, 
with  all  the  provisions  of  unlimited  liability  in  force.  In  this 
respect  they  closely  resemble  the  Xew  Kngland  das  and  Coke 
Company,"  or  the  real  estate  trusts,  of  which  there  are  several 


148  TRUSTS,   POOLS   AND   CORPORATIONS 

in  Boston.  The  leading  example  of  these  in  the  field  of  quasi- 
public  corporations  is  the  Massachusetts  Electric  Companies. 
This  association  now  controls  what  were  originally  some  forty 
distinct  street  railroad  companies,  forming  an  unbroken  net- 
work throughout  the  eastern  quarter  of  the  state.  These  oper- 
ating companies  have  an  aggregate  stock  capitalization  of  about 
$9,000,000.*  They  seem  to  be  slowly  consolidating,  it  is  said2 
with  the  end  in  view  of  merger  in  a  single  corporation,  to  be 
known  as  the  Massachusetts  Electric  Company.  The  $10,000,000 
of  stock  of  this  consolidation  will  then  be  entirely  owned  by  the 
Massachusetts  Electric  Companies'  Association,  represented  by 
securities  outstanding  to  the  amount  of  $24,000,000.  The  legal 
status  of  this  latter  organization  is  as  yet  undetermined  by  the 
courts.  In  any  event,  a  prompt  extension  of  the  provisions  of 
the  anti-stock-watering  acts  to  cover  all  such  associations  would 
surely  act  as  a  powerful  deterrent  in  future. 

Enough  has  been  said  to  illustrate  the  extreme  complexity  of 
the  problem  of  regulating  capitalization,  even  in  the  limited  class 
of  public-service  companies.  The  ultimate  remedy,  as  applied 
to  all  classes  of  corporations,  must  come  from  the  courts  and 
the  legislatures.  But  in  either  case  the  continued  necessity  of 
a  strong  and  steady  administrative  control  through  some  perma- 
nent board  or  commission,  supplementing  and  giving  due  effect 
to  the  law,  is  apparent.  Massachusetts  has  not,  perhaps,  accom- 
plished all  that  could  be  desired  as  yet  either  in  justice  to  the 
companies  or  to  the  public ;  but  her  experience  should  be  of 
great  value,  in  view  of  the  honest  purpose  which  seems  to  have 
inspired  it  throughout. 

WILLIAM  Z.  RIPLEY. 

MASSACHUSETTS  INSTITUTE 
OF  TECHNOLOGY. 

1  The  bonded  indebtedness,  amounting  to  approximately  $10,000,000  (?),  remains 
outside  the  control  of  the  association,  largely  in  the  hands  of  the  original  purchasers. 

2  Street  Railway  Items,  Sept.  15,  1900. 


VIII 

THE   UNITED   STATES    STEEL   CORPORATION'S 
BOND   CONVERSION1 

ON  April  17,  1902,  the  president  of  the  United  States  Steel 
Corporation  issued  a  circular  to  the  stockholders,  which 
invited  their  cooperation  in  a  plan  to  raise  $50,000,000  of  new 
capital.  Half  of  this  amount  was  to  repay  loans  incurred  by  the 
constituent  companies  for  construction  work  which  was  in  part 
rendered  unnecessary  by  the  merger,  but  which,  owing  to 
advance  commitments,  could  not  be  suspended.  In  addition, 
$25,000,000  was  required  for  improvements,  which,  it  was  stated, 
would  effect  an  annual  saving  of  at  least  $10,000,000.  The 
plan  proposed  to  the  stockholders  for  raising  this  money  was 
"  to  rearrange  your  corporation's  capitalization  (which,  in  round 
numbers,  now  consists  of  $300,000,000  of  bonds,  $500,000,000 
of  preferred  stock,  and  $500,000,000  of  common  stock)  by  sub- 
stituting for  $200,000,000  of  the  preferred  stock,  $200,000,000 
of  sinking  fund  sixty  year  5  per  cent  mortgage  gold  bonds,  and  by 
selling  $50,000,000  of  additional  bonds  of  such  issue  for  cash.  As 
the  preferred  stock  carries  7  per  cent  dividends,  while  the  bonds 
would  bear  but  5  per  cent  interest,  the  $50,000,000  desired  could, 
in  this  way,  be  added  to  the  corporate  resources,  and  the  aggregate 
of  the  annual  charges  for  interest  and  dividends,  instead  of  being 
increased  $3,500,000,  would  be  decreased  $1,500,000  as  com- 
pared with  the  present  sum  total  of  these  two  requirements." 

The  plan  offered  to  each  preferred  stockholder  the  right  to 
subscribe  to  the  new  bonds  to  the  extent  of  one-half  his  hold- 
ings of  preferred  stock,  40  per  cent  of  each  subscription  to  be 

1  From  the  Quarterly  Journal  of  Economics,  Vol.  XVIII,  1903,  pp.  22-^3,  with 
certain  minor  editorial  emendations  approved  by  the  author.  The  genesis  of  the 
Steel  Corporation  and  its  promotion,  finance,  and  capitali/ation  are  described  in 
Ibid.,  Vol.  XV,  pp.  517-550,  anil  Vol.  XVI,  pp.  214-233.  Both  chapters  are  incor- 
porated in  his  Trust  Finance.  —  ED. 

149 


150  TRUSTS,    POOLS   AND   CORPORATIONS 

payable  in  preferred  stock,  and  10  per  cent  in  cash,  or  the  sub- 
scription could  be  limited  to  40  per  cent,  in  which  event  no  cash 
payment  was  required.  The  circular  also  stated  that  a  syndicate 
had  been  formed,  "including  some  directors,"  to  further  the 
success  of  the  plan  ;  and,  in  the  call  for  a  special  meeting  of 
stockholders  to  be  held  May  19,  one  of  the  purposes  of  the 
meeting  was  stated  to  be  the  ratification  of  an  agreement  be- 
tween the  United  States  Steel  Corporation  and  J.  P.  Morgan 
and  Company,  acting  for  this  syndicate. 

This  agreement  is  dated  April  i,  1902,  and  contains  the  fol- 
lowing provisions  : 

1.  That  the  party  of  the  second  part,  known  as  "  the  bankers," 
on  or  before  the  first  day  of  July,  1902,  should  offer  to  the  pre- 
ferred stockholders  the  right  to  subscribe  to  the  second  mortgage 
bonds  of  the  company,  on  the  terms  mentioned  in  the  circular, 
for  a  period  of  thirty  clays  ; 

2.  That  such  part  of  the  $250,000,000  of  bonds  as  should  not 
be  taken  by  the  preferred  stockholders,  should  be  issued  to  the 
bankers  on  their  request  for  the  syndicate,  to  be   paid  for  in 
preferred  stock,  and  in  cash,  on  the  same  terms  as  those  offered 
to  the  preferred  stockholders,  in  such  amounts  and  at  such  times 
as  the  bankers  might  request,  up  to  October  i,  1903  ; 

3.  That  the  bankers  guarantee  to  the  Steel  Corporation  that 
subscriptions  to  the  new  bonds  to  the  amount  of  $100,000,000 
would  be  made,  payable  $20,000,000  in  cash,  and   $80,000,000 
in  preferred  stock  ; 

4.  That,  as  compensation  for  the  risk,  the  guarantee,  and  the 
various  obligations  assumed  by  the  syndicate,  the  Steel  Corpo- 
ration should  pay  to  the  bankers  a  cash  compensation  equal  to 
4  per  cent  upon  the  aggregate  amount  of  the  bonds  which  should 
be  sold  or  delivered,  either  to  the  preferred  stockholders  or  to 
the  syndicate,  until  October  r,  1903. 

The  plan  and  the  syndicate  agreement  were  submitted  to  the 
stockholders,  and  both  were  approved  by  a  vote  of  7,704,288 
shares  to  12,540  shares  out  of  a  total  number  of  10,185;  811 
shares  outstanding. 

Before  the  plan  could  be  put  into  effect,  an  injunction  was 
applied  for  on  June  8,  1902,  before  the  Chancellor  of  New 


THE    STEEL   CORPORATION'S   BOND    CONVERSION       151 

Jersey,  against  J.  P.  Morgan  &  Co.  by  Miriam  Berger,  a  pre- 
ferred stockholder,  to  forbid  them  to  issue  bonds  for  stock  under 
the  bankers'  contract,  and  alleging  that  the  plan  of  conversion 
was  unlawful  for  the  following  reasons:  (i)  that  the  plan,  if 
carried  out,  would  impair  the  complainant's  vested  rights  as  a 
stockholder  ;  (2)  that  the  plan  of  issuing  bonds  to  retire  stock 
was  void  against  any  dissenting  stockholder;  (3)  that  the  plan 
was  ruinous  and  disastrous,  and  impaired  the  value  of  complain- 
ant's stock ;  (4)  that  four  members  of  the  bankers'  firm  were 
directors  of  the  corporation  ;  and  (5)  that  the  compensation 
which  might  be  received  by  the  bankers  under  their  contract  was 
without  consideration  and  illegal,  and  that  the  scheme  was  de- 
vised to  secure  exorbitant  commissions  by  this  firm.  An  order 
restraining  the  bankers  from  issuing  any  bonds  in  exchange  for 
preferred  stock  was  granted  by  Vice-Chancellor  Emery  on  the 
ground  that  the  complainant's  vested  rights  would  be  impaired 
by  the  exchange  of  bonds  for  preferred  stock  under  the  terms 
proposed.1  The  case  was  appealed,  the  appeal  being  argued  on 
June  25. 

Before  the  appeal  was  decided,  on  July  5,  a  second  bill  was 
filed  by  J.  Aspinwall  Hodge,  Bernard  Smith,  and  William  II. 
Curtis  against  the  corporation,  the  bankers,  and  the  directors.2 
The  grounds  on  which  relief  was  asked  for  were  as  follows  : 

1.  That  the   plan   interfered  with   the  vested   rights  of  the 
complainants  ; 

2.  That  it  was  ultra  -circs  and  void  ; 

3.  That  the  Steel  Corporation,  under  the  act  of  1902,  could 
not  issue  bonds  for  stock,  because  it  had  not  paid  dividends  on 
the  preferred  stock  for  at  least  a  year  preceding  the  date  of  the 

1  The  ground  on  which  the  injunction  was  granted  was  :  "that  it  (the  conversion 
plan)  is  a  preferential  distribution  of  capital  among  some  of  the  shareholders  to  the 
exclusion  of  others,  and  not  a  plan  for  an  eijiial  distribution  among  all  the  preferred 
stockholders.  That  the  capital  represented  by  preferred  stock  up  to  a  limit  ot 
8200,000,000  is  to  be  reduced  to  the  extent  the  holders  agree  to  take  bonds,  and 
.  .  .  the  stock  of  those  who  decline  to  take  bonds  is  thus  made  subject  to  the  prior 
claim  and  ben  of  those  who  take  bonds." 

-  Smith  and  Curtis,  it  being  proven  that  they  were  not  registered  owners  of  stock 
at.  the  time  suit  was  brought,  obtained  no  recognition  in  the  litigation.  The  right 
of  Hodge  to  petition  for  an  injunction  \\as  rccogni/.ed. 


152  TRUSTS,    POOLS   AND   CORPORATIONS 

meeting,  and  because  its  assets,  after  deducting  the  amount  of 
its  bonded  debt,  were  not  equal  in  value  to  the  par  value  of  its 
preferred  stock ; 

4.  That  the  scheme  was  disadvantageous,  and  would  seriously 
damage  the  corporation  and  its  stockholders,  and  that  the  com- 
pensation to  the  bankers  was  exorbitant ; 

5.  That  the  action  of  the  directors  in  approving  the  plan  and 
contract  was  void,   because    fifteen   or  more  of    the  board  of 
directors  were  interested  in  the  underwriting  syndicate ; 

6.  That  the  plan  was  never  legally  ratified  by  the  necessary 
two-thirds  vote  of  the  stockholders,  because  the  votes  upon  the 
stock  controlled  by  the  bankers  and  members  of  the  syndicate 
must  be  counted  to  make  up  the  two-thirds  vote  required  by  law. 

The  injunction  asked  for  was  granted  October  29,  1902,  on 
a  portion  of  the  third  item  of  the  bill  of  complaint,  on  the 
ground  that  only  four  continuous  payments  of  dividends  on  the 
preferred  stock  had  been  made,  the  duration  of  the  period  from 
the  time  of  the  first  declaration  of  a  dividend,  July  2,  1901,  to 
the  date  of  the  stockholders'  special  meeting,  May  19,  1902, 
being  forty-four  days  less  than  one  year,  while  five  continuous 
quarterly  payments  should  have  been  made  to  fulfil  the  require- 
ments of  the  law.  An  appeal  was  allowed  to  the  Court  of 
Errors  and  Appeals,  where  the  case  was  re-argued  in  the 
November  term.  Decision  was  rendered  on  February  18,  1903, 
reversing  the  Vice-Chancellor,  and  deciding  in  favor  of  the  de- 
fendants, on  the  ground  that  all  the  requirements  of  the  law  had 
been  complied  with,  and  that  "  there  is  no  ground  presented  by 
the  case  or  agitated  in  the  briefs  of  counsel  which  will  justify 
the  interposition  of  a  court  of  equity  to  arrest  the  proposed 
action  of  the  defendants."  A  similar  decision  had  been  ren- 
dered by  the  Court  of  Appeals  in  the  Berger  case  on  October  1 1, 
1902.  The  Steel  Corporation  at  once  put  its  plan  into  effect. 

It  is  proposed,  in  the  following  pages,  to  outline  the  principal 
arguments  in  the  Hodge  suit  as  found  in  the  affidavits,  briefs, 
and  arguments  of  counsel.  Space  does  not,  however,  permit  an 
extended  analysis  of  these  arguments  ;  and,  for  the  most  part, 
the  merits  of  the  controversy  will  be  determined  by  the  decisions 
of  the  Vice-Chancellor  and  the  Court  of  Appeals  upon  the  dif- 


THE   STEEL   CORPORATION'S   BOND   CONVERSION       153 

fcrent  points  presented.  The  complainants  in  the  Hodge  suit 
presented  the  most  varied  and  forcible  criticisms  which  have 
been  made  of  the  bond  conversion  plan.  It  may  also  be  pre- 
sumed that  the  defendants  placed  their  side  of  the  question  in 
the  most  favorable  light.  With  the  opinions  of  two  courts  to 
assist  him,  the  reader  will  have  little  difficulty  in  determining  on 
which  side  lay  the  weight  of  the  evidence. 

Omitting  the  claim  that  the  vested  interests  of  the  complaining 
stockholders  would  be  impaired  by  the  proposed  conversion  of 
preferred  stock  into  bonds,  —  this  point  being  decided  in  the 
Berger  suit  in  favor  of  the  corporation,1 — and  passing  over,  as 
being  of  merely  technical  interest,  the  ground  on  which  the  Vice- 
Chancellor  granted  the  injunction,  we  find  that  the  complainants 
rested  their  case  upon  the  following  principal  arguments : 

1.  That  the  action  of  the  directors  in  sanctioning  the  plan 
was  illegal,  by  reason  of  the  private  interest  of  several  of  their 
number,  while  the   stockholders,  to  whom    the    extent    of    the 
directors'  interest  had  not  been  fully  disclosed,  could  not  vali- 
date their  illegal  action  ; 

2.  That  the  scheme  was  vitiated  by  actual  fraud,  being  plainly 
designed  to  favor  J.  P.   Morgan  &  Co.  and  their  associates,  at 
the  expense  of  the  corporation  ; 

3.  That  the  contract  with  the   syndicate  was   unfair   to   the 
stockholders,  both  in  the  length  of  time  given  to  them  to  sub- 
scribe for  the  bonds  as  compared  with  the  time  allotted  to  the 
syndicate,  and  the  unreasonable  options  granted  to  the  bankers  ; 

4.  That  the  Steel  Corporation  did  not  have  assets  of  the  value 
required  by  law. 

In  developing  the  alleged  illegal  private  interest  of  the  direc- 
tors, the  complainants  began  by  claiming  that  fifteen  of  the 
directors  of  the  Steel  Corporation,  including  the  six  members  of 

1  Opinion  of  the  Court  of  Errors  and  Appeals,  Van  Syckel,  ].,  (p.  11)  :  "That  this 
plan  involves  a  reduction  of  capital  stock  is  conceded:  it  is  the  very  purpose  of  the 
plan  to  redure  it  and  to  retire  it  ;  hut  to  the  assertion  that  it  is  preferential,  I  am 
unable  to  assent.  The  same  opportunity  is  i;iven  to  all  to  accept  the  offer,  none  are 
exiludcd,  and  the  complainant  \vlio  lias  declined  the  offer  cannot  say  to  the  ninety 
and  nine  who  have  accepted  it  that  they  ha\e  been  preferred.  There  has  been  no 
preference  on  the  part  of  the  corporation;  the  position  occupied  by  the  complainant 
is  of  her  uu  n  <  ption." 


154  TRUSTS,   POOLS   AND   CORPORATIONS 

the  Finance  committee,  were  members  of  the  underwriting  syn- 
dicate whose  agreement  with  the  syndicate  managers  was  dated 
March  12,  twenty-eight  days  before  the  resolution  of  the  direc- 
tors approving  the  contract  between  the  syndicate  and  the  Steel 
Corporation.  In  other  words,  at  the  meeting  on  April  i,  when 
the  contract  with  the  syndicate  came  up  before  the  directors,  a 
majority  of  the  board  were  "  personally  and  individually  inter- 
ested in  the  profits  and  advantages  to  be  derived  by  Morgan  & 
Co.  and  their  associates."  .  .  . 

These  benefits  were  considerable.  If  the  stockholders  sub- 
scribed to  the  full  amount  of  $250,000,000  of  bonds,  the  syndi- 
cate would  receive  $10,000,000  in  cash  from  the  corporation. 
In  addition  to  this  large  commission,  the  syndicate  had  the 
privilege  of  exchanging  preferred  stock  for  all  bonds  which 
were  not  taken  by  the  stockholders  ;  and  this  option,  it  was 
claimed,  presented  the  certainty  of  a  large  additional  profit.  It 
is  the  law  of  New  Jersey  that  where  the  personal  interest  of  a 
director  is  concerned  in  a  contract  with  his  corporation,  that 
contract  is  voidable.  On  this  ground,  the  complaints  asserted 
that  the  action  of  the  directors  was  illegal. 

The  answer  to  this  argument,  reserving  to  a  later  page  a  dis- 
cussion of  the  benefits  of  the  contract,  was  short  and  decisive. 
Such  contracts  as  the  one  in  question,  said  the  defendants,  while 
voidable  at  the  option  of  the  stockholders,  can  be  validated 
either  expressly  by  a  vote  of  the  stockholders,  or  by  the  stock- 
holders not  electing  to  take  any  action  in  the  matter.  In  the 
present  instance,  since  the  stockholders,  by  an  enormous  ma- 
jority, had  sustained  the  directors  in  their  approval  of  the  plan 
of  conversion,  to  say  nothing  of  the  fact  that  the  by-laws  of  the 
corporation  expressly  provided  that  directors  might  be  interested 
in  contracts  with  the  corporation,  and,  further,  "that  ,  .  .  any 
act  or  contract  that  shall  be  approved  or  ratified  by  the  vote  of 
the  holders  of  a  majority  of  the  capital  stock  of  the  company 
.  .  .  shall  be  as  valid  and  binding  upon  the  corporation  and 
upon  all  the  stockholders  as  though  it  had  been  approved  or 
ratified  by  every  stockholder  of  the  corporation,''  the  court  held 
that  the  infirmity  in  the  contract  had  been  entirely  eliminated, 
and  that  the  ratification  of  the  agreement  and  plan  was  complete. 


THE   STEEL   CORPORATION'S   BOND   CONVERSION       155 

The  complainants  then  attempted  to  show  that  less  than  the 
necessary  amount  of  stock  was  legally  voted,  by  setting  up  the 
plea  that  the  members  of  the  syndicate  had  no  right  to  vote  for 
the  ratification  of  a  scheme  in  which  they  were  personally  inter- 
ested as  opposed  to  the  interest  of  the  corporation,  thus  affirm- 
ing the  doctrine  that  the  rights  of  a  stockholder,  when  he 
becomes  a  director,  are  limited  by  the  director's  obligation  to  the 
corporation,  which,  it  was  alleged,  was  violated  in  the  present 
instance,  and  going  so  far  as  to  impose  a  similar  obligation  upon 
a  stockholder  who  was  not  a  director.  This  argument  was 
stated  as  follows  :  .  .  .  "  It  is  contended  that  where  a  large 
number  of  stockholders  conspire  to  impose  a  burden  upon  a 
corporation  for  their  own  benefit,  ignoring  the  interest  of  the 
corporation,  they  thereby  become  constructively  trustees  for  their 
fellow-stockholders,  assume  the  obligations  of  trustees  toward 
their  fellow-stockholders,  and  must  deal  with  them  accordingly." 

The  defendants  replied,  and  the  court  agreed  with  them,  that 
a  stockholder  can  never  be  deprived  of  his  right  of  ownership 
in  a  corporation  and  of  the  right  to  vote  the  number  of  shares 
which  he  holds  upon  any  question  affecting  his  interest.  Judge 
Van  Syckel  remarked  in  his  opinion  : 

They  [the  directors]  voted  upon  that  resolution,  not  as  directors,  not 
in  their  fiduciary  capacity,  but  solely  in  the  right  of  the  shares  of  stock 
held  by  them.  A  most  valuable  privilege,  which  attaches  to  the  own- 
ership of  stock  in  a  corporation,  is  the  right  to  vote  upon  it  at  any 
meeting  of  stockholders.  As  to  the  resolution  considered  by  itself,  as 
stockholders,  they  owed  no  greater  duty  to  their  ro-stockholders  than 
those  stockholders  owed  to  them.  Like  other  stockholders,  they  had  a 
right  to  be  influenced  by  what  they  conceived  to  be  for  their  own  inter- 
est, and  they  cannot  lawfully  he  denied  that  right,  nor  can  it  be  limited 
or  circumscribed  by  the  fact  that  they  occupied  the  position  of  directors 
in  the  company. 

But,  continued  the  complainants,  granted  that  the  vote  was 
legal  on  the  assumption  that  the  stockholders  fully  understood 
the  nature  of  the  resolutions  upon  which  they  were  voting,  that 
assumption  was  contrary  to  the  tacts.  The  stockholders  were 
not  aware  of  the  nature  of  the  contract  alre:idv  made  with  the 
syndicate,  nor  with  the  extent  of  the  personal  interest  ot  the 


156  TRUSTS,    POOLS  AND   CORPORATIONS 

directors  in  this  contract.  The  only  information  in  regard  to 
these  matters  contained  in  any  of  the  documents  sent  to  the 
stockholders,  appears  in  the  circular  of  April  17,  and  was  as 
follows :  "  To  further  the  success  of  the  plan,  there  has  been 
formed  a  syndicate,  including  some  directors,  which  will  receive 
four-fifths  of  the  4  per  cent  compensation  to  be  paid  under 
the  contract  with  Messrs.  J.  P.  Morgan  &  Co.  mentioned  in  the 
notice  of  stockholders'  meeting."  It  was  further  stated  in 
the  notice  of  the  stockholders'  special  meeting,  that  copies  of 
the  directors'  resolution,  in  which  the  nature  of  the  contract 
was  explained,  and  of  the  contract  itself,  could  be  obtained  on 
application  at  Morgan  &  Co.'s  office.  This  notice,  the  com- 
plainants asserted,  was  insufficient  to  acquaint  the  stockholders 
with  the  nature  of  these  contracts  which  they  were  were  asked 
to  approve. 

The  defendants  replied  in  the  words  of  a  decision  upon  another 
case  cited  in  the  brief  of  the  defendants  upon  appeal  : 

If  the  party  notified  make  reasonable  investigation,  he  obtains  actual 
knowledge  of  these  facts  ;  if  he  choose  not  to  make  it,  he  is  charged 
constructively  with  knowledge  of  them.  ...  If  he  is  unwilling  to  act 
upon  the  facts  as  the  notice  presents  them,  then  the  law  demands  that 
he  shall  make  proper  examination,  and  upon  the  result  of  that  examina- 
tion he  may  safely  stand.  .  .  .  But,  if  he  prefer  not  to  examine,  it 
must  be  because  he  is  satisfied  to  act  as  if  the  matters  disclosed  in  the 
notice  were  true,  and  he  cannot  afterward  complain  if  his  rights  are 
made  to  rest  upon  them  so  far  as  they  are  true.  The  information  given 
by  the  notice  is  equivalent  to  that  obtained  by  the  inquiry.1 

This  principle  has  been  established  in  a  number  of  cases.  It 
was  reaffirmed  by  the  Court  of  Appeals  in  its  decision  that  the 
information  furnished  to  the  stockholders  of  the  Steel  Corpora- 
tion in  regard  to  the  various  contracts  and  resolutions  was  suffi- 
cient to  put  them  on  inquiry.  In  fact,  so  little  question  was 
raised  at  the  time  concerning  the  expediency  of  the  scheme  that 
no  stockholder  applied  to  J.  P.  Morgan  &  Co.  for  a  copy  of  the 
contract.  The  defendants  were,  therefore,  apparently  justified 
in  their  claim  that  the  stockholders  received  all  the  information 
which  they  required. 

1  Gale  v.  Morris,  3  Stew.  2X5,  289,  290. 


THE   STEEL   CORPORATION'S   BOND   CONVERSION       157 

THE  CHARGE  OF  FRAUD 

The  evidence  submitted  by  the  complaining  stockholders  to 
substantiate  their  charge  of  fraud  lay  in  the  nature  of  the  trans- 
actions in  controversy.  They  claimed  that  the  conversion 
scheme  was  bound  up  with  the  syndicate  agreement ;  that  it 
would  not  have  been  brought  forward  had  it  not  been  for  the 
benefits  which  the  syndicate  was  to  derive ;  and  that  the  com- 
pensation received  by  the  syndicate,  and  the  privileges  allotted 
to  it,  were  unreasonable  and  extortionate. 

Here  was  a  corporation,  they  said,  in  urgent  need  of  at  least 
$50,000,000  to  complete  improvements  already  begun,  and  to 
undertake  further  improvements  whose  completion  would  add 
at  least  $10,000,000  to  its  profits.  This  money  was  to  be 
borrowed  on  the  security  of  a  second  mortgage.  The  interest 
was  to  be  provided  by  converting  a  7  per  cent  dividend 
charge  on  $200,000,000  of  preferred  stock  into  a  5  per  cent 
interest  charge  on  the  same  amount  of  bonds.  Ostensibly  to 
insure  the  success  of  this  plan,  the  aim  and  object  of  which  was 
to  raise  a  certain  amount  of  cash,  an  underwriting  scheme  was 
devised,  which,  however,  entirely  subordinated  the  raising  of 
cash  to  the  conversion  of  stock  into  bonds.  The  underwriting 
plan  devised  by  the  directors  undertook  to  guarantee,  not  the 
amount  of  cash  required,  but  a  plan  of  conversion  whose  com- 
plete success  would  not  have  increased  the  security  of  the  pro- 
posed bond  issue,  nor  have  rendered  the  bonds  more  attractive 
in  the  eyes  of  investors,  —  a  measure,  moreover,  which  made 
inadequate  provision  for  the  real  needs  of  the  corporation.  The 
syndicate,  in  other  words,  instead  of  guaranteeing  to  take 
850,000,000  of  bonds  at  par,  and  to  pay  for  these  bonds  in  cash, 
which  the  commonly  understood  principles  of  underwriting 
demanded,  agreed  to  take  only  §20,000,000  of  bonds  at  par,  for 
which,  after  deducting  their  assured  commission  of  84,000,000 
on  the  8100,000,000  of  bonds  whose  purchase  with  cash  and 
stock  they  had  guaranteed,  the  corporation  would  receive  only 
816,000,000  of  cash.  Moreover,  if  the  amount  of  bonds  remain- 
ing should  be  taken  by  the  stockholders,  the  additional  commis- 
sions of  the  syndicate  would  reduce  their  actual  cash  guarantee 


158  TRUSTS,    POOLS   AND    CORPORATIONS 

to  $11,200,000,  or  little  more  than  one-fifth  of  the  amount  which 
the  stockholders  have  been  told  was  necessary.  On  the  basis 
of  the  actual  cash  furnished,  the  commission  to  the  syndicate, 
assuming  that  the  plan  was  successfully  carried  out,  would  be 
44  per  cent,  —  an  extraordinary  and  unreasonable  compensation.1 
Furthermore,  in  answer  to  the  argument  set  forth  in  the  affi- 
davit of  Mr.  Perkins,  in  which  he  claimed  that,  in  the  opinion  of 
the  Finance  Committee  of  the  Steel  Corporation,  the  immediate 
effect  of  the  announcement  of  the  contemplated  withdrawal  of 
40  per  cent  of  the  preferred  stock  would  be  to  send  its  price 
above  par,  and  so  make  conversion  unattractive,  and  that  the 
necessity  of  segregating  a  large  amount  of  preferred  stock  in 
order  to  make  sure  that  at  least  $80,000,000  of  stock  would  be 
exchanged,  as  provided  by  the  syndicate  agreement,  involved 
great  risk  and  the  locking  up  of  a  large  sum  of  money 
for  a  considerable  time,  the  complainants  urged  that,  in  any 
event,  the  bonds,  which  were,  on  the  admission  of  the  Fi- 
nance Committee  of  the  Steel  Corporation,  a  higher  grade  secur- 
ity than  the  preferred  stock,  —  else  why  convert  the  stock 
into  bonds  ?  —  would  always  sell  at  a  higher  price  than  the 
stock,  and  that,  therefore,  the  necessity  of  guaranteeing  the  con- 
version did  not  appear.  There  could  be  no  reasonable  doubt 
that  the  corporation  could  sell  820,000,000  of  its  second  mort- 
gage bonds  for  more  than  $  16,000,000,  the  maximum  amount  of 
cash  which  it  stood  to  receive  from  the  syndicate.  The  assur- 
ance given  by  the  syndicate  that  the  amount  required  for  dis- 
tribution to  the  security  holders  would  be  decreased  $1,500,000 
per  year  could  have  no  effect  upon  the  price  of  the  bonds,  and 
could  therefore  lend  only  indirect  assistance  to  the  conversion. 
Moreover,  a  large  amount  of  this  $80,000,000  preferred  stock 
was  already  the  syndicate's  property  at  the  time  the  contract 
was  made  ;  and,  so  far  from  locking  up  funds  in  fulfilling  their 
agreement,  the  members  of  the  syndicate  were  in  reality  increas- 
ing the  value  of  their  property.  In  short,  it  was  claimed  that 
the  guarantee  of  the  syndicate  contained  an  inconsiderable 
benefit  for  the  Steel  Corporation,  in  return  for  which  the  syndi- 
cate was  to  receive  a  large  cash  commission. 

IvKvard  B.  Whitney  fur  Appellees,  p.  21. 


THE    STEEL    CORPORATION'S    BOND    CONVERSION       159 

THE  CHARGE  OF  DISCRIMINATION 

In  support  of  the  charge  of  discrimination,  the  complainants 
argued  that  the  plan  created  two  classes  of  subscribers  to  the 
new  bonds:  (i)  the  syndicate;  (2)  the  other  preferred  stock- 
holders. Class  i  were  offered  the  bonds  at  96;  class  2,  at  100. 
Class  i  had  an  option  on  part  of  the  bonds  for  seven  and  one- 
half  months,  and  an  option  on  such  portion  of  the  remainder 
as  were  not  taken  by  the  preferred  stockholders  for  sixteen  and 
one-half  months,  which  period  could  be  extended  by  agreement 
between  the  syndicate  and  the  directors.  Class  2  had  an  option 
limited  to  fifty-eight  days.  Class  i  could  exchange  their  hold- 
ings of  preferred  stock  to  any  amount,  while  class  2  were  limited 
to  40  per  cent  of  their  preferred  stock  holdings.  "  The  syndi- 
cate," said  the  complainants,  "after  cutting  off  the  preferred 
stockholders  not  in  the  syndicate  by  the  thirty  (or  fifty-eight) 
days'  notice,  could,  at  any  time  before  the  first  day  of  January, 
1904  (and  later  by  means  of  extending  the  time),  purchase  1000 
shares  of  preferred  stock  at  the  market  price,  —  say  83,  —  pay- 
ing therefor  $83,000 ;  then  call  upon  the  Steel  Corporation 
under  one  of  the  options  to  deliver  to  them  bonds  to  the  amount 
of  $100,000  in  exchange  for  the  1000  shares  of  stock,  and  sell 
the  bonds  at  the  market  price,  —  say  95, — -thus  making  $12,000 
without  the  slightest  trouble  or  expense,  except  that  which  would 
attend  a  few  minutes'  clerical  work.  And  this  process  could  be 
repeated  in  larger  or  smaller  amounts  from  time  to  time,  when- 
ever the  relative  market  prices  of  the  stock  and  bonds  should 
make  it  profitable  to  do  so.  Would  not  this  be  a  palpable 
injustice  to  stockholders  of  the  corporation,  and  especially  to 
the  preferred  stockholders,  not  members  of  the  syndicate,  who 
had  exchanged  40  per  cent  of  their  preferred  stock  for  bonds?" 

The  answer  of  Mr.  Perkins  to  this  charge  has  been  already 
referred  to.  He  asserted  that,  without  the  guarantee  of  the 
syndicate,  the  success  of  the  conversion  plan  would  have  been 
endangered  by  the  appreciation  in  the  value  of  the  preferred 
stock.  Me  does  not  answer  the  argument  that  the  compensa- 
tion was  excessive  in  consideration  of  the  benefit  received  by 
the  corporation,  except  so  far  as  to  assert  that  the  syndicate 


160  TRUSTS,   POOLS   AND   CORPORATIONS 

agreement  was  "  a  most  desirable  one  for  the  United  States 
Steel  Corporation,"  but  rests  the  justification  of  the  compensa- 
tion almost  entirely  on  the  risk  assumed  by  the  syndicate.1  In 
the  Berger  suit,  where  this  point  was  more  fully  discussed,  and 
to  which  constant  reference  was  made  in  the  Hodge  litigation, 
the  expediency  of  the  contract  with  the  syndicate  was  justified 
by  the  argument  which  Mr.  Perkins  employed,  and  the  large 
risk  incurred  by  the  syndicate  was  thus  explained  in  the  brief 
of  counsel  for  the  corporation  : 

Is  it  reasonable  to  contend  that  the  tying  up  of  $100,000,000  of  capi- 
tal involves  no  risk  or  consideration  and  warrants  no  compensation? 
Can  it  be  said  that  a  syndicate,  which  undertakes  an  obligation  of 
$100,000,000  and  for  the  purpose  of  performing  that  obligation  ties  up 
by  actual  deposit  $80,000,000  of  property,  is  furnishing  no  considera- 
tion for  an  agreement  to  pay  a  commission  ?  Suppose,  pending  action 
by  the  stockholders,  the  preferred  stock  of  the  syndicate  had  fallen  in 
value  from  94  to  8-\  (as  it  actually  did)  or  even  lower,  and  there  was 
a  falling  market  occasioned  by  strikes  or  financial  disaster,  who  would 
recompense  the  syndicate  for  the  loss  that  it  would  sustain  by  the  depre- 
ciation of  its  stock?  ...  A  variation  of  four  points  in  the  relative  value 
of  the  seven  per  cent  cumulative  preferred  stock  and  the  new  five  per  cent 
bonds  would  at  once  wipe  out  the  profits  of  the  syndicate  and  turn  the 
venture  into  a  loss.  .  .  .  For  example,  it  may  well  be  that  the  present 
market  value  of  the  proposed  new  five  per  cent  bonds  is  95,  and  that 
the  present  market  value  of  the  preferred  stock  is  88,  a  depreciation  of 
6  per  cent  since  the  syndicate  deposited  the  $80,000,000  of  stock. 
What,  then,  would  be  the  outcome  of  the  risk  of  the  syndicate  if  the 
plan  had  been  disapproved  by  the  stockholders,  or  if  it  should  now  be 
set  aside  by  the  courts?  The  syndicate  has  tied  up  $80,000,000  of 
stock,  which  now  shows  a  loss  of  6  per  cent,  or  $4,800,000,  and  this 
loss  exceeds  the  promised  commission,  which  they  would  not  receive 
if  the  contract  were  not  approved,  and  in  addition  the  syndicate  is 

1  The  following  quotation  from  Mr.  Perkins's  affidavit  is  of  interest  in  this  connec- 
tion: "The  largest  participations  in  the  syndicate  were  taken  only  after  urgent  so- 
licitation by  me  and  upon  my  agreeing  that  my  firm  would  take  an  equal  amount. 
The  participation  taken  by  Mr.  Schwab  and  by  some  of  the  other  directors  \vas  upon 
the  understanding  that,  if  \ve  found  other  parties  to  take  any  part  of  such  participa- 
tions, we  would  do  this,  and  thus  release  them.  My  firm  considered,  and  I  believe 
most  of  the  directors  believed,  that  the  syndicate  contract  was  not  a  particularly 
profitable  one  for  the  syndicate.  In  no  instance  did  we  find  any  stockholder  willing 
to  subscribe  for  the  full  amount  of  his  holdings  in  preferred  stock." 


THE   STEEL   CORPORATION'S   BOND    CONVERSION       161 

bound  to  take  $20,000,000  of  bonds,  which  bonds  are  only  worth  95 
in  the  market,  showing  an  additional  loss  of  $1,000,000.  It  is  submitted 
that  the  mere  statement  of  these  facts  must  satisfy  any  court  that  the 
syndicate  has  since  the  first  of  April,  1902,  run  a  very  great  risk,  that 
it  is  still  running  a  great  risk,  that  in  all  fairness  and  propriety  a  reason- 
able compensation  may  be  paid  for  that  risk,  and  that  the  agreed  com- 
pensation is  not  excessive.1 

It  is  unfortunate  that  the  defendants  did  not  feel  themselves 
compelled  to  legitimate  the  syndicate  agreement,  not  merely 
by  citing  the  risk  undergone,  but,  as  the  complainants  chal- 
lenged them  to  do,  by  showing  a  corresponding  benefit  to  the 
corporation.  As  complainants'  counsel  remarked  : 

The  directors  of  an  industrial  corporation  would  not  be  justified  in 
paying  a  million  dollars  to  a  person  who  offered  to  swim  the  Atlantic, 
unless  they  could  show  that  some  benefit  would  be  conferred  upon  the 
corporation  by  the  accomplishment  of  that  feat.  The  fact  that  the 
gentleman  proposing  the  scheme  insisted  upon  the  enormous  risk  that 
he  ran  would  not  justify  the  directors  in  closing  the  contract. 

It  would  have  been  better,  we  must  admit,  if  only  for  the  sake 
of  gaining  a  larger  measure  of  general  approval  for  their  pro- 
ject, if  the  defendants  had  presented  this  portion  of  their  argu- 
ment in  a  less  general  and  sweeping  manner. 

For  the  immediate  purpose  of  winning  their  case,  however, 
it  was  merely  necessary  for  the  defendants  to  keep  before  the 
court  the  fact  that  the  contract  between  the  Steel  Corporation 
and  Messrs.  J.  P.  Morgan  &  Co.  was  approved  of  by  more  than 
99r,  Pcr  cent  of  the  stockholders  represented  at  the  special 
meeting.  Behind  this  fact,  in  passing  upon  the  legitimacy  of 
the  transaction,  in  the  absence  of  specific  proof  of  fraud,  the 
court  could  not  go.  As  Vice-Chancellor  Emery  said  in  his 
opinion  which  was  quoted  in  the  decision  of  the  appellate 
court : 

The  reasonableness  or  judiciousness,  in  the  business  aspect,  of  a 
reduction  of  the  preferred  stock  of  the  Steel  Corporation,  and  the 
distribution  of  capital  resulting  therefrom,  by  the  conversion  of  stock 
into  bonds,  is  ...  altogether  a  matter  of  management  of  the  affairs 


1 62  TRUSTS,    POOLS   AND   CORPORATIONS 

of  the  corporation,  upon  which  the  decision  of  the  directors  and  stock- 
holders given  in  the  manner  required  by  law  is  final,  so  far  as  it  relates 
to  its  business  aspects. 

.  And  Judge  Van  Syckel,  in  the  final  decision,  stated  the  same 
principle  in  more  general  terms,  quoting  from  his  opinion  in  the 
Berger  case  : 

The  manner  in  which  a  duly  authorized  plan  is  to  be  carried  through 
is  part  of  the  business  of  the  corporation,  and,  in  the  absence  of  fraud 
or  bad  faith,  is  not  the  subject  of  judicial  control  to  any  greater  extent 
than  any  other  business  of  the  corporation.  The  court  cannot  substitute 
its  judgment  for  that  of  the  directors  and  majority  stockholders,  and  say 
that  a  less  expensive  plan  could  be  successfully  adopted. 

In  short,  so  long  as  the  directors  acted  in  good  faith  and  with 
entire  frankness,  they  might,  unless  expressly  forbidden  by  the 
law,  have  converted  all  their  preferred  stock  into  a  6  or  7  per 
cent  bond;  they  might  have  incurred  a  floating  debt  equal  to 
their  mortgage  indebtedness ;  they  might  have  abolished  the 
charge  for  depreciation ;  they  might  have  paid  their  president 
a  salary  of  $5,000,000  per  year.  In  fact,  they  might  have  vio- 
lated many  rules  of  business  prudence  if  only  they  could  secure 
the  approval  of  a  majority  of  the  stockholders.  In  New  Jersey, 
a  stockholder,  generally  speaking,  is  allowed  to  do  what  he  will 
with  his  own. 

That  the  court  was  convinced  of  the  honesty  and  good  faith 
of  the  transaction  appears  from  the  expression  of  Justice  Van 
Syckel : 

There  is  an  entire  absence  in  the  case  of  anything  to  show  a  taint 
of  fraud,  or  an  attempt  to  conceal  from  the  shareholders  any  fact  which 
should  have  influenced  their  action.  That  the  entire  proceeding  was 
conducted  with  good  faith,  without  concealment,  and  with  fairness  to 
both  parties,  is  evinced  by  the  fact  that  during  all  the  litigation  which 
has  ensued,  under  the  promotion  of  a  shareholder  who  did  not  attend 
the  meeting,  not  one  of  the  vast  number  of  shareholders  who  were  pres- 
ent in  person  or  by  proxy,  comprising  men  of  great  business  capacity, 
interested  to  the  extent  of  millions  of  dollars  in  the  conversion  plan,  has 
questioned  its  propriety,  or  expressed  a  desire,  so  far  as  appears,  to  recede 
from  it. 


THE   STEEL   CORPORATION'S   BOND   CONVERSION       163 

THE  VALUATION  OF  THE  ASSETS 

A  New  Jersey  corporation  cannot  convert  preferred  stock  into 
bonds  unless  its  assets,  after  the  deduction  of  all  indebtedness, 
are  equal  to  its  preferred  stock.1  In  their  attempt  to  prevent 
the  conversion  of  preferred  stock  into  bonds,  the  complaining 
stockholders  laid  final  emphasis  upon  the  alleged  fact  that  the 
assets  of  the  Steel  Corporation  were  not  worth  the  necessary 
amount;  namely,  $880,024,900.  In  proof  of  this  assertion,  the 
complainants  relied  mainly  upon  the  affidavits  of  one  James  H. 
Lancaster,  who  represented  himself  to  be  "a  mechanical  and 
mining  engineer  and  expert  on  ores  and  steel  and  iron  properties 
and  their  products."  .  .  .  Mr.  Lancaster  made  two  affidavits  in 
the  suit,  —  the  first,  a  preliminary  affidavit,  on  July  3,  1902,  and 
the  second,  in  more  detail,  on  July  14. 

In  his  first  affidavit,  Mr.  Lancaster  stated  that  he  was  "familiar 
with  and  had  made  a  study  of  all  the  various  properties  and 
plants  "  of  the  Steel  Corporation,  that  the  plants  and  properties 
could  be  duplicated  for  about  $300,000,000,  and  that  the  total 
value  of  all  the  properties,  including  good  will  and  organization, 
was  not  worth  $500,000,000. 

Two  weeks  later,  Mr.  Lancaster,  in  his  second  affidavit,  went 
into  the  subject  of  valuation  in  more  detail,  and  presented  the 
statement  upon  which  this  portion  of  the  complainants'  case  was 
to  depend.  He  stated,  first,  that  the  plants  of  the  Carnegie 
company,  representing  44  per  cent  of  the  productive  capacity 
of  the  Steel  Corporation,  had  been  valued  on  March  12,  1900, 
by  the  partners  of  the  Carnegie  Steel  Company  at  $75,600,000. 
This  valuation  was  stated  in  the  answer  of  the  company  to 
Mr.  Prick's  bill  of  complaint  to  be  "a  full,  fair,  and  accurate 
valuation  of  these  assets,"  and  also  that  "the  experience  and 
judgment  of  business  men  justify  us  in  saying  (as  we  do)  that 
such  a  method  of  valuation  in  large  manufacturing  companies, 
and  especially  of  iron  and  steel  in  our  country,  as  a  rule,  is  more 
liberal  to  the  seller  than  to  the  buyer  ;  for  experience  has  shown 
that  partnership  assets  on  a  just  appraisement  seldom  reach 


164 


TRUSTS,   POOLS   AND   CORPORATIONS 


the  value  at  which  they  stand  on  the  books  of  the  concern." 
Mr.  Lancaster,  accepting  this  statement  as  accurate,  estimated 
the  total  value  of  the  Steel  Corporation's  properties,  upon  the 
basis  of  the  1900  valuation  of  the  Carnegie  properties,  and 
including  $27,000,000  of  Frick  Coke  Company  assets  subse- 
quently added,  at  $200,000,000. 

He  also  presented  a  table  showing  the  conversion  value  of  the 
securities  of  the  constituent  companies  in  the  securities  of  the 
United  States  Steel  Corporation,  as  follows : 


COMMON 
STOCK 

PREFERRED 
STOCK 

BONDS 

Constituent  c 
United  States 

330O,OOO,OOO 
508,000,000 

$247,000,000 
510,000,000 

$219,000,000 
362,000,000 

Steel  Corporation     .     . 

$208,000,000 
69 

$263,000,000 
1  06 

$143,000,000 
65 

Percentage 

of  increase  

The  inference  drawn  from  this  comparison  of  capitalizations  was 
that,  unless  the  capital  of  the  constituent  companies  was  far 
below  the  value  of  their  assets,  the  capitalization  of  the  United 
States  Steel  Corporation  greatly  exceeded  the  value  which  sup- 
ported its  securities.  Mr.  Lancaster  concluded  his  affidavit  by 
expressing  the  opinion  that  the  1902  earnings  of  the  United 
States  Steel  Corporation  represented  the  results  of  an  exception- 
ally prosperous  condition  of  the  market,  and  that  many  new 
plants  were  then  building  to  compete  with  the  corporation  in 
all  its  departments. 

The  arguments  of  complainants'  counsel  in  support  of  these 
affidavits  were  mainly  taken  up  with  showing  that  the  iron  and 
steel  trade  was  subject  to  sudden  and  extreme  reverses  and  to 
long  periods  of  depression,  and  that  these  contingencies  had  not 
been  allowed  for  in  the  capitalization  of  the  Steel  Corporation. 
They  contended:  (i)  that  the  value  of  a  group  of  assets  was 
based  on  the  selling  price  of  those  assets,  which  in  turn  de- 
pended solely  upon  their  earning  power,  and  that,  while  the 
Steel  Corporation  was  then  earning  interest  and  dividends  on 
all  classes  of  its  securities,  there  was  no  assurance  that  these 


THE   STEEL   CORPORATION'S   BOND    CONVERSION       165 

earnings  would  be  sufficiently  permanent  to  warrant  the  belief 
that  the  selling  value  of  the  company's  assets  could  properly  be 
based  upon  a  capitalization  of  their  amount;  (2)  that  the  1902 
price  of  steel  was  an  abnormal  price,  dependent  on  temporary 
conditions,  and  resulting  in  earnings  which  should  be  disregarded 
in  making  an  estimate  of  the  ability  of  the  corporation  to  pay 
the  large  increase  in  interest  charges  which  would  result  from 
the  success  of  the  conversion  plan;  (3)  they  asserted  that  the 
directors  of  the  Steel  Corporation  were  about  to  carry  through 
a  plan  which  was  not  merely  unnecessary  and  expensive,  but 
dangerous  as  well,  —  a  plan  which  would  increase  its  mortgage 
debt  beyond  what  experience  showed  would  be  the  minimum 
value  of  its  assets,  a  plan  whose  success  spelled  bankruptcy, 
should  the  history  of  the  steel  trade  be  repeated.  The  argument 
of  the  complainants,  in  brief,  was  based  entirely  on  considera- 
tions of  business  probability,  and  on  the  results  of  business 
experience.  Affirming  that  the  requirements  of  the  New  Jersey 
corporation  law  were  designed  for  the  protection  of  the  investor, 
they  asked  the  court  to  interpret  the  meaning  of  the  statute  in 
the  light  of  business  probability,  and  to  refuse  its  sanction  to  a 
measure  which  conservative  judgment  would  disapprove.1 

This,  however,  as  shown  by  its  refusal  to  throw  out  the  con- 
version plan  because  of  its  alleged  expensiveness,  the  court  was 
not  prepared  to  do.  So  long  as  the  requirements  of  the  law 
were  complied  with,  which  in  this  case  meant  a  certification  by 
the  officers  of  the  corporation  that  its  assets,  after  deducting  all 
indebtedness,  were  equal  in  value  to  the  amount  of  its  preferred 
stock,  and  in  the  absence  of  fraud,  the  court  had  no  right  to 
interfere. 

This  certification  was  furnished  in  a  series  of  affidavits  remark- 
able because  of  their  prodigal  frankness  and  the  varied  standards 
of  valuation  which  they  set  up.  The  subject-matter  of  these 
affidavits,  so  far  as  they  relate  to  the  question  of  assets,  may  be 

1  Argument  of  Edward  B.  Whitney  (p.  41)  :  "T  submit  that  the  sole  object  of  the 
Legislature  in  establishing  this  restriction  as  to  the  amount  of  assets  was  to  make 
the  recapitalization  entirely  safe  for  at  least  the  preferred  stock,  .  .  .  to  secure  that 
in  case  of  insolvency  a  foreclosure  of  the  new  bonds  would  result  in  the  reali/atum 
of  the  full  value  of  the  preferred  stock  if  the  latter  were  properly  protected." 


1 66 


TRUSTS,    POOLS  AND    CORPORATIONS 


divided  as  follows  :  (i)  valuations  of  property  ;  and  (2)  estimates 
of  future  earnings.  The  leading  affidavit  for  the  defendants 
was  made  by  Mr.  Schwab,  who  swore  to  the  statement  that  the 
total  value  of  the  corporation's  assets,  without  making  any  allow- 
ance for  good  will  and  established  business,  patents,  trade-marks, 
and  processes,  or  for  $150,000,000  of  orders  on  hand,  exceeded 
the  total  amount  of  its  capitalization.  This  statement  was  not 
made  in  general  terms,  but  was  supported  by  a  list  of  assets, 
giving  the  value  assigned  to  each  and  the  basis  of  valuation  em- 
ployed. For  purposes  of  convenience,  the  material  of  this  affi- 
davit has  been  arranged  in  the  following  table  : 


ASSETS 


VALUATION 


PRINCIPLES  GOVERNING  VALUATION 


I.    Iron    and    ore   prop- 
erties. 


2.  Plants,  mills,  fixtures, 

machinery,  equip- 
ment, tools,  and 
real  estate. 

3.  Coal  and  coke  fields 

(87,589  acres). 

4.  Transportation  prop- 

erties. 


5.    P>last  furnaces. 
(>.    Natural  gas  fields. 


3700,000,000  i.  Properties  cannot  be  duplicated  at  any 
price. 

2.  Yield  direct  profit  of  $30,000,000  on 

present  price  of  ore. 

3.  The   Steel  Corporation  would  be  com- 

pelled   to   pay  $700,000,000   in  order 
to  obtain  these  deposits. 

$300,000,000      I.    Impossibility  of  duplicating  these  mills 

for  a  less  amount. 

2.  The  mills  are  necessary  to  make  the 
profits  of  the  corporation,  stated  to  be 
at  the  rate  of  $140,000,000  per  year. 

$100,000,000  i  i.  Xet  profits  to  the  corporation,  based 
on  the  present  prices  of  coal  and  coke, 
over  $12,000,000. 


880,000,000 
after  de- 
ducting 
$40,340,000 
of  bonded 
debt. 


Cost  of  duplication. 

Profits  of  mills  increased  $10,000,000, 

because  of  possession  of  transportation 

facilities. 


$48,000,000        i.    Cost  of  duplication. 
$20,000,000        i.    Profit  of  $2,000,000. 


1.  Cost  of  duplication. 

2.  Profit  of  8500,000. 


84,000,000 
8214,278,000       i.    (.'ash  assets  valued  at  cost. 


THE   STEEL   CORPORATION'S   BOND    CONVERSION       167 

Mr.  Schwab  employs  two  leading  principles  in  valuing  these 
assets, — (i)cost  of  duplication  and  (2)  profits  derived  from 
their  possession.  Of  his  estimate  of  $140,000,000  as  the  earn- 
ings of  the  corporation,  $54,500,000  is  directly  accounted  for  by 
the  savings  on  ore,  coal  and  coke,  transportation,  limestone,  and 
natural  gas.  The  direct  profits  of  the  mills  easily  make  up  the 
remainder. 

Mr.  Schwab's  affidavit  was  supplemented  by  the  affidavits  of 
other  officials.  Mr.  Elbert  H.  Gary,  chairman  of  the  Finance 
Committee,  testified  that  the  "intrinsic  value."  of  the  properties, 
as  set  forth  by  Mr.  Schwab,  were  true  and  conservative.  Mr. 
James  Gayley,  first  vice-president,  and  in  general  charge  of  the 
mining  and  transportation  of  raw  material,  stated  in  his  affidavit 
that  the  ore  properties  of  the  corporation  were  not  only  the  most 
extensive  known,  but  were  of  such  high  grade  and  quality  as  to 
make  them  specially  suited  to  the  production  of  the  best  quality 
of  iron  and  steel;  and:  "  that  investigations  have  demonstrated 
that  the  deposits  of  this  region  are  practically  circumscribed  as 
to  quality,  and  that,  if  any  new  deposits  are  to  be  found,  it  will 
undoubtedly  be  at  points  which  are  much  further  removed  from 
sites  suited  to  the  economical  manufacture  and  distribution  of 
product,"  and,  further,  "that  they  could  not  be  duplicated  or 
reproduced  at  any  price." 

President  Lynch,  of  the  Frick  Coke  Company,  supported  Mr. 
Schwab's  statement  by  the  assertion  that  the  315,000,000  tons 
of  coking  coal  still  contained  in  the  Connellsville  basin  were 
worth,  on  a  profit  of  50  cents  per  ton, — 75  cents  below  the 
profit  then  being  made,  —  8157,500,000.  President  James  H. 
Reed  of  the  Pittsburg,  Bessemer  &  Lake  Lrie  Railroad  Com- 
pany, in  perhaps  the  most  carefully  worded  affidavit  of  the  series, 
affirmed  that  the  cost  of  the  transportation  properties  of  the  cor- 
poration, alter  deducting  the  amount  of  their  bonded  debt,  was 
approximately  850,000,000,  and  that  their  cost  of  duplication 
would  be  far  in  excess  of  this  amount,  since  in  many  cases  it 
would  be  impossible  to  duplicate  these  facilities.  The  final  affi- 
davit as  to  the  value  of  the  property  was  made  by  William  J. 
Filbert,  comptroller  of  the  Steel  Corporation,  who  stated  that 
on  the  basis  of  the  highest  prices  reached  for  the  two  stocks, 


1 68  TRUSTS,   POOLS  AND   CORPORATIONS 

the  total  market  value  of  all  the  corporation's  securities  was 
$1,149,014,932. 

The  defendants  were  also  at  considerable  pains  to  controvert 
the  statements,  sworn  to  in  the  Carnegie-Frick  litigation  of  1900, 
that  $75,600,000  represented  a  "  full,  fair,  and  accurate  valuation 
of  the  Carnegie  Steel  Company's  assets."  James  J.  Campbell, 
auditor  and  assistant  secretary  of  the  Carnegie  company,  in  his 
affidavit  demolished  the  truth  of  the  statement  made  by  the 
defendants  in  Frick  v.  The  Carnegie  Steel  Company.  He  showed 
that  all  the  properties  of  the  Carnegie  Steel  Company  had  been 
carried  on  the  books  for  many  years  at  the  original  costs,  and 
that  no  allowance  had  ever  been  made  for  the  money  expended 
on  them  for  improvements,  which  in  some  instances  far  exceed 
the  original  outlay.  The  question  at  issue  in  the  Frick-Carnegie 
litigation,  said  Mr.  Campbell,  did  not  concern  the  actual  value  of 
the  Carnegie  company's  property,  but  merely  involved  the  basis 
of  settling  for  the  interests  of  deceased  or  withdrawing  partners. 
Mr.  Schwab  also  took  the  same  ground  in  his  affidavit:  "  It  was 
claimed  in  such  litigation,  and  such  was  the  fact,  that  the  book 
value  did  not  represent  the  actual  value  of  the  properties.  Under 
the  terms  of  the  agreement  to  which  Mr.  Frick  was  a  party,  it 
was  provided  that  the  book  value  should  determine  the  interests 
of  the  several  associates,  and  the  controversy  between  Mr.  Frick, 
on  the  one  hand,  and  Mr.  Carnegie  and  his  associates,  on  the 
other,  was  as  to  whether  this  nominal  book  value  should  control, 
or  the  actual  value,  which  Mr.  Frick  alleged  to  be  in  excess  of 
$250,000,000." 

The  defendants  did  not  stop  with  estimates  of  present  valua- 
tion. They  accepted  the  standard  of  business  probability  which 
the  complainants  claimed  should  be  applied  to  determine  the 
value  of  the  Steel  Corporation's  assets,  and  asserted  that,  in 
their  judgment,  the  earnings  of  the  Steel  Corporation  would 
never  fall  so  low  as  to  endanger  the  interest  on  the  second 
mortgage  bonds.  As  a  matter  of  record,  these  predictions 
should  be  preserved. 

Mr.  Schwab  stated  that,  if  the  conversion  plan  were  carried 
through,  the  fixed  charges  of  the  corporation  —  he  makes  no 
allowance  for  depreciation  —  would  be  $31,737,850.  The  earn- 


THE   STEEL   CORPORATION'S   BOND    CONVERSION      169 

ings  of  the  corporation  were  then  more  than  four  and  one-half 
times  this  amount,  leaving  a  margin  of  75  per  cent  above  the 
danger  of  bankruptcy.  "The  most  careful  investigation,"  said 
Mr.  Schwab,  "  was  made  at  the  time  the  board  of  directors  voted 
to  recommend  the  issue  of  $250,000,000  of  second  mortgage 
bonds,  to  determine  whether,  under  any  reasonable  possible  con- 
ditions, the  earnings  of  the  Steel  Corporation  would  be  reduced 
below  the  total  fixed  charges  of  $31,737,850.  The  unanimous 
opinion  of  the  officers  and  directors  who  had  a  lifetime  of  experi- 
ence in  the  business  was  that,  under  no  conditions  of  the  iron 
and  steel  trade  or  of  business  depression,  was  there  any  reason- 
able likelihood  that  the  earning  capacity  of  these  vast  properties 
would  be  reduced  to  any  such  extent."  This  part  of  Mr. 
Schwab's  affidavit  was  repeated  in  almost  identical  terms  by 
Mr.  Gary,  who  stated  that  the  board  of  directors  was  unani- 
mously of  this  opinion.  It  is  unfortunate  that  these  vigorous 
statements  do  not  start  from  an  assumption  of  at  least  $60,000,000 
of  fixed  charges,  for,  on  Mr.  Schwab's  basis  of  valuation,  a 
330,000,000  charge  for  depreciation  would  be  none  too  large. 

Under  the  weight  of  this  mountain  of  testimony,  the  argu- 
ments of  the  complainants,  which  they  admitted  were  founded 
on  "  cx-partc  and  argumentative  affidavits,"  were  crushed  to  the 
ground.  They  were  forced  to  admit  that  their  part  of  the  case 
was  in  a  condition  far  from  satisfactory,  and,  in  fact,  were  unable 
to  bring  any  rebuttal  evidence  or  argument  worthy  of  comment, 
contenting  themselves  with  repeating  their  original  contentions.1 

Furthermore,  the  appearance  of  Mr.  Lancaster  in  the  case  gave 
the  defendants  an  opportunity  to  impeach  the  good  faith  of  the  suit, 
which  they  did  not  fail  to  improve.  As  an  illustration  of  the  mo- 
tives which  animate  the  movers  in  these  so-called  "strike  suits," 
of  which  it  was  charged  that  this  was  an  example,2  a  portion  of 


ly  for] 


'-  See  page  176  infra. 


TRUSTS,    POOLS   AND   CORPORATIONS 

* 

the  affidavit  of  Joseph  E.  Corrigan,  an  attorney  in  the  office  of 
Guthrie,Cravath  &  Henderson,  may  be  advantageously  presented. 
Mr.  Corrigan  stated  that  on  August  15  Mr.  Lancaster,  on  his  own 
initiative,  made  to  him  and  Mr.  Guthrie  substantially  the  follow- 
ing statement : 

"That  on  the  third  day  of  July,  1902,  a  young  man  named 
Preskauer  handed  them  the  business  card  of  the  law  firm  of 
James,  Schell  &  Elkus,  and  told  him  that  Mr.  Elkus  wanted  to 
see  him  at  his  (Elkus')  office.  That  he  at  once  proceeded  to  said 
office,  and  there  for  the  first  time  met  Mr.  Elkus  whom  he  had 
never  known  before.  That  he  was  introduced  by  Mr.  Elkus  to 
David  Lamar,  that  said  Lamar  thereupon  talked  to  him  in  the 
presence  of  said  Elkus  about  the  United  States  Steel  Corpora- 
tion's properties  and  their  values,  and  after  some  conversation 
said  that  he  desired  an  affidavit  as  to  the  values;  that  said  Lan- 
caster did  not  know  and  was  not  told  that  the  affidavit  was  to  be 
used  in  litigation,  and  did  not  observe  any  title  of  a  suit,  to  what 
at  the  time  he  swore  to.  That  he  protested  that  it  was  impossi- 
ble for  him  in  so  short  a  time  to  make  an  affidavit;  but  that  said 
Lamar  said  they  would  be  satisfied  with  his  present  impressions, 
and  what  he  knew  generally  about  the  steel  business  ;  and  that 
they  \vould  give  him  Sioo  for  the  affidavit.  Said  Lancaster 
further  stated  that  he  needed  the  money,  and  that,  as  this  was 
an  easy  way  to  make  Sioo,  he  was  willing  to  swear  to  the 
affidavit,  although  he  did  not  know  what  it  was  to  be  used  for, 
and  supposed  it  was  simply  for  said  Lamar's  information,  or  for 
some  purpose  said  Lamar  had  in  mind,  and  that  he  gathered 
from  what  Lamar  said  to  him  that  it  was  to  be  a  guide  for  invest- 
ing in  stocks.  Said  Lancaster  further  stated  to  Mr.  Guthrie  and 
myself  that,  a  few  clays  afterwards,  he  for  the  first  time  ascer- 
tained that  his  affidavit  had  been  used  in  a  suit  against  the 
United  States  Steel  Corporation.  That  he  went  at  once  and 
protested  to  Mr.  Lamar  .  .  .  that  he  had  been  deceived.  Said 
Lamar  thereupon  agreed  to  pay  him  $250  a  week  and  Sio,ooo 
when  they  succeeded  in  making  a  settlement,  which  he  (Lamar) 
assured  Lancaster  would  not  be  later  than  November  i.  That 
he  made  a  second  affidavit  in  the  suit,  for  which  he  was  paid 
8400.  That  he  then  had  a  row  with  Lamar  over  the  subject  of 


THE   STEEL   CORPORATION'S   BOND   CONVERSION       171 

his  compensation,  that  he  threatened  to  expose  them  all,  and 
that  finally  Lamar  agreed  to  pay  him  $500,  making  $1000  in 
all,  provided  said  Lancaster  would  execute  a  general  release  and 
sign  a  letter  to  the  effect  that  he  would  not  disclose  to  any  one 
what  had  occurred  in  Mr.  Elkus'  office  —  that  he  understood 
from  what  Mr.  Lamar  and  others  said  in  Mr.  Elkus'  office  that 
they  expected  to  make  big  money  out  of  the  suit,  and  that  a 
number  of  the  suits  were  in  preparation  and  would  be  brought 
one  after  another  until  a  settlement  was  forced."1 

The  weight  of  the  argument  as  to  the  value  of  the  Steel 
Corporation's  assets  was  plainly  with  the  defendants.  Vice- 
Chancellor  Emery  supported  their  contention  at  every  point. 
He  stated  in  his  opinion  that  the  certificate  of  value  required 
by  the  law  had  been  filed  by  the  proper  officers,  and  that  "  upon 
the  affidavits  filed  there  can  be  no  question  whatever  as  to  their 
honesty  and  good  faith  in  making  this  certificate  as  to  value." 
This  certificate,  it  is  true,  was  not  conclusive  evidence,  but 
might  be  shown  to  be  false.  The  proof  of  its  falsity,  however, 
in  this  case,  had  not  been  furnished.  The  affidavits  filed  by  the 
defendant  company,  said  the  Vice-Chancellor,  on  this  question 
of  the  value  of  the  assets,  are  "  full,  complete,  and  detailed,  and 
are  made  by  persons  entirely  familiar  with  the  property,  or 
portions  of  the  property,  as  to  whose  value  they  affirm.  The 
affidavits  as  to  value  filed  by  complainant  are,  on  the  other 
hand,  general,  vague,  and  made  without  special  knowledge  or 
examination,  and  the  credibility  of  the  principal  affiant  on  the 
part  of  the  complainant  is  seriously  impaired  by  his  own  admis- 
sions in  his  latest  affidavit.  Upon  these  affidavits  as  to  value, 
I  would  not  be  justified  in  enjoining  the  issue  of  the  bonds, 
pending  the  final  hearing."  The  Court  of  Appeals,  while 
passing  upon  the  arguments  of  the  complainant,  apparently  did 
not  consider  the  discussion  of  the  value  of  assets  of  sufficient 
importance  to  even  refer  to  it. 

The  United  States  Steel  Corporation,  in  the  Hodge  suit,  won 
a  complete  victory.  Its  opponents  were  not  merely  routed,  but 


1/2  TRUSTS,    POOLS   AND    CORPORATIONS 

the  honesty  of  their  motives  was  seriously  impugned.  The 
legality,  and,  so  far  as  the  court  went  in  this  direction,  the  wis- 
dom of  the  plan  for  converting  bonds  into  stock,  were  upheld. 
The  vindication  of  the  defendants  could  not  have  been  more 
complete. 

There  is,  however,  another  side  to  the  question.  Apart  from 
the  provisions  of  the  New  Jersey  corporation  act  which  the 
directors  were  careful  to  obey,  the  facts  brought  out  by  the 
Berger  and  Hodge  suits  constitute,  a  .serious  indictment  of 
the  wisdom  of  the  bond  conversion  plan.  Surely,  at  this  late 
day,  few  will  be  found  to  indorse  a  plan  to  change  a  dividend 
requirement  on  8200,000,000  of  stock  into  an  interest  require- 
ment on  $200,000,000  of  bonds,  for  no  better  reason  than  to 
save  the  interest  and  sinking  fund  charges  on  an  additional 
$50,000,000  of  bonds.  The  mere  statement  of  the  plan,  which 
runs  directly  against  every  recognized  canon  of  corporation 
finance,  is  sufficient  to  secure  its  condemnation.  The  proposal 
ignored  the  mortgage  lien  of  the  bonds  which  were  to  be  sub- 
stituted for  stock,  and  the  fact  that  with  the  issue  of  the  new 
bonds  the  borrowing  capacity  of  the  corporation  would  be  ex- 
hausted, for  the  sake  of  saving  84,000,000  in  dividend  pay- 
ments, 2  per  cent  of  the  net  profits  of  the  company  in  1902. 

\Ye  have  become  familiar  with  plans  for  the  conversion  of 
bonds  into  stock  where  the  purpose  is  to  reduce  fixed  charges. 
Projects  for  purchasing  stock  with  bonds  secured  by  the  stock 
—  for  example,  the  purchase  of  Burlington,  Jersey  Central,  and 
Louisville  &  Nashville — are  not  uncommon.  In  such  cases, 
the  purchasing  company  can  apply  the  dividends  on  the  stock 
to  the  payment  of  interest  on  the  new  bonds  ;  and  the  lien, 
aside  from  a  guarantee  which  can  be  enforced  only  with  great 
difficulty,  is  on  the  stock  which  the  bonds  were  issued  to  pur- 
chase. Such  projects  have  to  commend  them  either  the  reduc- 
tion of  fixed  charges,  or  the  gaining  control  of  companies  where 
control  means  a  large  increase  in  the  earnings  of  the  parent 
corporation.  But  to  propose  a  conversion  scheme  for  no  better 
reason  than  to  reduce  dividends  in  favor  of  interest,  is  a  propo- 
sition which  has  little  to  commend  it. 


THE   STEEL   CORPORATION'S   BOND    CONVERSION       173 

Then,  too,  can  the  syndicate  agreement,  when  drawn  from 
under  the  healing  wings  of  the  stockholders'  approval,  stand 
the  test  of  critical  examination  ?  The  theory  advanced  by  de- 
fendants' counsel,  that  the  amount  of  the  syndicate's  compensa- 
tion should  be  determined,  not  by  the  benefit  to  the  corporation, 
but  by  the  risk  of  the  syndicate,  would  seem  to  be  untenable. 
Underwriting  syndicates  are  usually  supposed  to  guarantee 
cash.  Their  commission  is  based  upon  the  amount  of  cash  for 
which  they  are  liable.  The  maximum  commission  in  the  case 
under  consideration  was  44  per  cent  of  the  cash  guarantee,  —  an 
amount  out  of  proportion  to  the  benefit  received.  The  argu- 
ment that  it  was  necessary  to  sequester  a  large  amount  of  pre- 
ferred stock  in  advance  of  the  announcement  of  the  conversion 
plan,  because  of  the  practical  certainty  that  the  announcement 
would  raise  the  price  of  the  preferred  stock  above  par  and  make 
conversion  undesirable,  is  singularly  weak.  In  what  manner 
the  placing  of  $12,500,000  of  interest  charges  ahead  of  the 
preferred  stock  dividends,  would  advance  the  value  of  the  latter 
security,  can  better  be  imagined  than  described.  The  course  of 
the  preferred  stock  since  the  conversion  plan  was  announced 
offers  an  interesting  commentary  upon  the  prescience  of  the 
Finance  Committee. 

Space  does  not  permit  an  extended  examination  of  the 
methods  employed  in  valuing  the  assets  of  the  Steel  Corpora- 
tion. At  the  time  these  affidavits  were  made,  there  can  be  no 
question  that,  as  worded,  they  deserved  the  high  praise  awarded 
them  by  the  Vice-Chancellor,  of  being  full,  complete,  and  de- 
tailed, and  of  being  made  in  honesty  and  good  faith.  In  July, 
1902,  the  corporation  was  earning  at  the  rate  of  $140,000,000 
per  year ;  and  the  "  present  worth  "  of  its  assets,  which  is  the 
plain  meaning  of  the  law,  was  in  excess  of  $1,400,000,000.  If 
the  argument  of  the  complainants  was  to  stand,  the  law  should 
have  read  something  as  follows:  "that  no  corporation  shall  be 
permitted  to  retire  its  preferred  stock  by  the  issue  of  bonds 
whose  earnings,  in  the  judgment  of  some  competent  tribunal, 
shall  not  at  all  times  be  adequate  to  pay  dividends  on  the  pre- 
ferred stock."  In  such  an  event,  however,  the  question  would 
never  have  come  before  the  court  in  the  course  of  litigation. 


174  TRUSTS,   POOLS  AND   CORPORATIONS 

It  would  have  been  definitely  settled  beforehand.  As  the  law 
stands,  and  looking  only  to  present  value,  the  adequacy  of 
Steel  Corporation's  assets  in  July,  1902,  to  conform  to  the 
requirements  is  evident. 

But  what  shall  be  said  of  the  wisdom  of  the  policy  which 
accepts  such  a  valuation  as  a  basis  for  incurring  $10,000,000 
additional  of  fixed  charges  without  corresponding  increase  of 
assets  ?  The  fixed  charges  of  the  Steel  Corporation,  assuming 
that  the  conversion  scheme  had  been  a  complete  success,  and 
making  adequate  allowance  for  depreciation,  would  have  been 
at  least  $70,000,000  per  year.  As  they  now  stand,  with  only 
$150,000,000  of  preferred  stock  exchanged,  they  are  not  far 
from  $65,ooo,ooo.1  Here  is  a  necessary  reduction  in  earnings 
before  the  limit  of  fixed  charges  is  reached,  not  of  75  per  cent, 
as  stated  in  the  directors'  affidavits,  but  of  50  per  cent.  There 
will  be  few  persons  found,  who  are  in  any  way  conversant  with 
the  history  of  the  steel  trade,  to  affirm  that  the  earnings  of  any 
steel  corporation  could  not  be  reduced  one-half  by  a  very  mod- 
erate decline  in  prices.  The  Steel  Corporation  averaged  a 
profit  of  $16  per  ton  during  1902.  It  may  fairly  be  questioned 
whether  the  conditions  of  competition  and  demand  warrant  the 
proposition  that  a  profit  of  $8  per  ton  can  be  secured  when  the 
trade  is  at  its  lowest  ebb. 

As  above  remarked,  however,  while  the  directors  were  ready 
to  swear  to  the  belief  that  the  profits  of  the  Steel  Corporation 
would  never  be  reduced  as  low  as  831,000,000,  they  included  no 
allowance  for  depreciation  in  their  estimate  of  fixed  charges. 
Their  judgment  would  not,  therefore,  be  impeached,  should  the 
earnings  of  the  Steel  Corporation  fall  below  its  fixed  charges. 
If  the  rule  be  accepted,  however, — that,  in  issuing  bonds,  a 
corporation  should  always  maintain  a  wide  margin  between 
minimum  net  earnings  and  fixed  charges,  —  it  is  impossible  to 
approve  a  plan  to  add  812,500,000  to  the  interest  charges  of 

1  This  statement  is  not  based  upon  official  announcements,  hut  upon  common 
report  at  the_time  the  life  of  the  syndicate  was  extended.  If  the  <jap  between  pre- 
fer rej  stock  and  bonds  is  not  closed,  there  is  every  reason  to  expect  that  the  opera- 
tions of  the  syndicate  in  purchasing  preferred  stock  for  retirement  will  insure  the 
final  success  of  the  plan  of  commission. 


THE   STEEL   CORPORATION'S   BOND   CONVERSION       175 

the  United  States  Steel  Corporation.  The  fixed  charges  of  the 
company  were  too  high  before  for  entire  safety.  The  issue  of 
$250,000,00x3  of  bonds,  or  even  $150,000,000,  can  be  described 
by  no  other  word  than  unwise. 

The  Hodge  and  Bcrger  suits  may  have  been  inspired  by 
improper  motives,  but  they  have  served  to  call  attention  to  cer- 
tain glaring  defects  in  American  corporation  law.  The  time 
has  gone  by  when  the  determination  of  great  questions  of  cor- 
porate policy,  involving  the  welfare  of  the  community  as  well 
as  the  interests  of  stockholders,  can  be  safely  left  to  their  own 
judgment.  The  average  stockholder  in  corporations  such  as 
the  Steel  Corporation  is  incapable  of  forming  a  judgment  on 
questions  such  as  those  under  discussion.  He  is  one  of  a  flock 
of  sheep  who  follow  first  one  false  shepherd  and  then  another, 
until,  inverting  the  parable,  for  every  sheep  that  is  safely  folded, 
ninety-and-nine  are  hopelessly  led  astray.  He  invests  because 
he  has  confidence  in  some  individual.  Unfortunately,  his  con- 
fidence is  frequently  misplaced.  The  laws  of  those  states,  such 
as  New  Jersey,  in  which  most  large  companies  are  incorporated, 
give  the  stockholders  abundant  protection  against  directors  and 
officers  who  attempt,  by  concealment  and  fraud,  to  violate  their 
trust.  These  laws,  however,  give  no  protection  to  the  stock- 
holder against  his  own  ignorance  and  credulity.  If  the  stock- 
holder was  the  only  one  to  suffer  the  consequences  of  his  own 
simplicity,  there  might  be  no  reason  for  advocating  a  plan  of 
federal  control  which  would  compel  directors  to  follow  a  con- 
servative policy  in  the  distribution  of  earnings  and  the  readjust- 
ment of  capital.  But  where  the  history  of  each  day  is  furnishing 
new  evidence  that  the  prosperity  of  the  community  is  jeopardized 
by  reckless  financiering,  it  is  plain  that  the  people  should,  for 
their  own  protection,  take  out  of  the  hands  of  stockholders  the 
control  of  matters  with  which  they  are  incompetent  to  deal, 
and  by  the  enactment  of  laws  similar  to  those  which  regulate 
the  conduct  of  national  banks,  compel  directors  to  keep  at  all 
times  within  the  limits  of  conservatism. 

If  the  tremendous  decline  in  the  securities  of  the  largest 
industrial  corporation  in  the  world  —  a  decline  which  is  almost 
without  parallel,  and  which  has  inflicted  heavy  losses  upon  tens 


1 76  TRUSTS,   POOLS  AND   CORPORATIONS 

of  thousands  of  stockholders  —  shall  furnish  the  object-lesson 
necessary  to  bring  the  American  people  to  their  senses  upon 
this  question  of  the  necessity  of  rigid  federal  control  of  large 
corporations,  the  United  States  Steel  Corporation  will  not  have 
lived  in  vain. 

EDWARD  SHERWOOD  MEADE. 
THE  UNIVERSITY  OF  PENNSYLVANIA. 


THE  STEEL  CORPORATION'S  BOND  CONVERSION  :  A  CORRECTION1 

In  the  preceding  article  Professor  Meade  gives  prominence 
to  the  recent  suit  of  Mr.  Hodge  against  the  Steel  Corporation, 
referring  to  it  as  if  it  might  have  been  a  "strike  suit."  That 
the  defendants  in  this  suit  could  obtain  a  withdrawal  with- 
out pecuniary  outlay  was  well  known  to  them.  Mr.  Hodge's 
offer  of  withdrawal,  made  through  me  in  writing  at  an  early 
stage  of  the  litigation,  asked  simply  a  resubmission  of  the 
scheme  to  the  stockholders  with  full  information  as  to  its  main 
features,  or  else  its  modification  by  taking  from  the  Morgan 
syndicate  all  advantage  over  the  other  preferred  stockholders, 
giving  it  no  longer  option  to  subscribe  for  the  bonds,  no  greater 
time  to  pay  subscriptions,  and  no  commission  except  upon  the 
amount  which  the  syndicate  should  absolutely  bind  itself  to 
underwrite. 

The  point  upon  which  the  Vice-Chancellor  decided  the  case 
in  Mr.  Hodge's  favor,  if  sustained,  would  have  forced  a  resub- 
mission to  the  stockholders.  It  would  probably  then  have  been 
voted  clown.  The  notice  upon  which  their  proxies  had  been 
obtained  had  been  so  drawn  as  to  give  the  impression  that  the 
whole  bond  issue  had  been  underwritten  ;  and  the  syndicate's 
extraordinary  option  was  not  apparent.  The  stockholders  were 
indeed  informed  that  by  calling  at  the  Morgan  office  they  could 
secure  complete  copies  of  the  proposed  contract ;  but,  as  Pro- 
fessor Meade  truly  says,  nobody  called.  Each  assumed  that  he 
had  enough  information,  and  did  not  need  to  examine  legal  doc- 
uments. The  most  interesting  question  to  the  public  in  the 

1  From  the  Quarterly  Journal  of  Economics,  Vol.  XVIII,  1904,  p.  303. 


THE    STEEL   CORPORATION'S   BOND    CONVERSION       177 

Hodge  suit  was  whether  this  notice  sufficiently  discharged  the 
duties  of  the  directors.  The  New  Jersey  court  held  that  it  did. 
Other  courts  have  set  up  a  much  higher  standard,  and  required 
of  interested  directors  the  fullest  disclosure.  The  standard  set 
by  the  state  which  has  fathered  so  large  a  proportion  of  the 
modern  "trusts"  has  had  no  small  influence  upon  public  confi- 
dence in  their  securities. 

Time  has  already  vindicated  Mr.  Hodge.  Public  sentiment 
recognizes  this,  and  has  forced  the  surrender  of  the  syndicate 
option.  Mr.  Schwab's  valuations  have  been  condemned  by  the 
market,  and  by  the  abandonment  of  dividends,  to  the  loss  of 
so  many  common  stockholders.  The  principle  of  his  valuation, 
that  in  bonding  a  company  it  should  be  capitalized  on  the  basis 
of  the  profits  of  a  year  of  prosperity,  instead  of  upon  the  avail- 
ability of  its  assets  in  a  period  of  depression,  was  never  indorsed 
by  conservative  men,  although  it  passed  muster  with  the  New 
Jersey  courts. 

The  fact  that  Mr.  Hodge  was  publicly  joined  as  complainant 
by  no  other  stockholder  of  record  was  not  due  to  lack  of  sympa- 
thy, —  of  that  he  received  a  plenty,  —  but  to  two  conditions 
which  are  among  those  that  most  contribute  to  the  success  of 
the  modern  "trust"  financier.  Persons  with  large  interests  at 
stake  cannot  afford  to  join  openly,  because  they  are  afraid  that 
the  dominant  powers  in  \Yull  street  may  take  revenge  by  attack- 
ing their  financial  credit  and  excluding  them  from  profitable 
enterprises.  Small  stockholders  have  not  sufficient  interest 
pecuniarily  to  justify  the  annoyance  and  notoriety  and  the  news- 
paper abuse  to  which  they  would  be  subjected.  Even  necessary 
expert  testimony  is  difficult  and  expensive  to  obtain,  through 
fear  of  boycott ;  and  the  swiftness  with  which  the  directors'  plans 
are  carried  through  after  their  announcement  leaves  stockholders 
but  little  time  for  consultation  and  none  for  deliberate  action. 
It  is  only  when  the  plans  fail  for  other  causes,  as  in  the  ship- 
building case,  that  the  minority  have  time  for  investigation  or 
combined  action. 

EDWARD  B.  WHITNEY. 

XK\V  YORK. 


i;8  TRUSTS,   POOLS   AND   CORPORATIONS 

THE   LATER   HISTORY   OF   THE   UNITED   STATES   STEEL 
BOND    CONVERSION1 

THE  underlying  motives  for  this  most  extraordinary  fiscal 
operation  have  been  variously  interpreted.  It  has  been  freely 
ascribed  to  the  desire  of  important  owners  of  the  preferred 
stock  to  dispose  of  their  unwieldy  holdings  to  the  public  in  the 
form  of  bonds.  Others  allege  that  participation  in  industrial 
investments  by  large  life  insurance  companies  would  be  less 
indefensible  in  the  purchase  of  bonds  than  of  preferred  stock. 
Even  among  the  large  body  of  private  investors,  there  are  many 
who  will  purchase  bonds,  but  will  buy  stocks  only  of  the  highest 
grade.  The  bond  having  a  right  of  foreclosure  cannot  decline 
in  value  below  a  point  determined  by  its  equity  interest  in  the 
property.  Stocks  are  not  thus  limited  as  to  their  possible  decline 
in  value  ;  but  may  fall  to  any  degree.  A  double  motive,  in  the 
judgment  of  authorities,  existed.  The  bonds  would  naturally 
have  a  better  market  than  the  stock.  The  stock,  also,  if  on  a 
dividend  basis  would  command  a  better  price,  if  the  supply  of  it 
in  the  market  were  thus  reduced.  This  consideration,  in  days 
of  "  undigested  securities,"  was  an  important  one.  That  impera- 
tive need  of  cash  for  improvements  was  not  the  sole  motive,  as 
publicly  alleged  by  the  company,  would  seem  to  follow  from 
a  number  of  considerations.  For,  in  the  first  place,  cessation 
of  dividends  on  common  stock  would  speedily  have  supplied  the 
necessary  funds  from  current  earnings,  following  the  conserva- 
tive policy  of  railway  companies,  without  resort  to  conversion  at 
all.  This  expedient  was  certainly  possible  under  the  conditions 
which  prevailed  when  the  plan  was  resumed  in  March,  1903. 
A  year  of  litigation  had  resulted  in  a  dissolution  of  the  injunc- 
tion granted  by  a  lower  court.  Enormous  earnings  of  the  com- 
pany meanwhile  had  resulted,  in  December,  1902,  in  "undivided 
earnings"  of  $33,841,565  upon  the  year's  business.  Under 
such  circumstances  the  imperative  need  for  cash  urged  on 
behalf  of  the  original  plan  certainly  did  not  exist.  A  second 
cogent  criticism  against  this  alleged  motive  is  that  the  plan  as 


LATER    HISTORY    OF   THK    BOND    CONVERSION       179 

approved,  and  afterwards  as  actually  carried  out,  would  result 
in  entirely  insignificant  cash  receipts  as  compared  with  the 
magnitude  of  the  other  operations  involved.  At  the  most, 
the  only  source  of  ready  cash  from  the  plan  would  be  the 
sale  of  $20,000,000  of  bonds  at  par,  from  which  the  commis- 
sion of  4  per  cent  for  the  syndicate  would  be  necessarily  de- 
ducted. Yet  the  official  statement  given  out  on  November  19, 
1903,  by  the  Executive  Committee  of  the  Board  of  Directors 
showed  that  only  $2,902,000  of  such  bonds  had  been  actually 
sold  at  par  for  cash,  paid  for  in  full  October  I,  and  already 
issued.  On  the  remainder  of  the  minimum  $20,000,000  of 
bonds  guaranteed  by  the  syndicate  for  cash  on  October  21, 
only  25  per  cent  had  been  called  for  and  paid  to  the  corpo- 
ration. Had  the  real  reason  for  this  entire  operation  lain, 
as  alleged,  in  the  imperative  need  for  cash,  why  was  not 
the  syndicate  called  upon  promptly  for  the  balance  of  its 
guarantee  ? 

From  the  foregoing  considerations  it  seems  perfectly  clear 
that  an  important  motive  for  this  transaction  was  to  secure  a 
large  profit  to  prominent  bankers  who  were  represented  at  the 
same  time  on  the  Board  of  Directors  of  the  Steel  Corporation. 
This  interpretation  seems  to  flow  from  the  original  plan  as  pro- 
posed. It  derives  added  force  from  the  subsequent  history  of  the 
enterprise.  Stockholders  were  permitted  until  May  16,  1903, 
to  take  advantage  of  the  conversion  scheme.  At  that  time  the 
bonds  were  selling  above  90  and  the  preferred  stock  was  a  few 
points  lower.  The  exchange  would  therefore  leave  a  profit  prob- 
ably less  than  5  per  cent.  The  syndicate,  however,  had  not 
only  guaranteed  a  conversion  of  S8o,ooo,ooo  of  this  preferred 
stock  ;  but  its  contract  provided  that  it  might,  if  so  disposed,  con- 
vert the  balance  of  the  S2OO, 000,000  of  preferred  stock  author- 
ized for  exchange  into  bonds.  The  life  of  the  syndicate  was 
to  terminate  October  I,  1903.  Meanwhile  the  margin  between 
the  market  price  of  the  new  bonds  and  the  preferred  stock  had 
perceptibly  widened.  In  other  words,  depression  in  the  steel 
industry  was  becoming  evident.  Suddenly  the  financial  com- 
munity was  startled  by  a  circular  notice  announcing  that  the  life 
of  the  syndicate  had  been  extended  from  October  i,  1903,  until 


i8o  TRUSTS,    POOLS   AND    CORPORATIONS 

the  following  July.1  Obviously  this  cleared  the  way  for  a  con- 
tinued conversion  of  the  preferred  stock  into  bonds  at  a  continu- 
ally growing  profit  determined  by  the  widening  margin  between 
the  two  classes  of  securities.  This  profit  was  not  open  to  the 
general  stockholders  whose  option  had  expired  in  the  preceding 
May.  November  brought  news  of  still  further  trade  contraction, 
until  the  preferred  stock  was  quoted  at  about  50,  while  the  new 
5  per  cent  bonds  were  selling  some  fifteen  points  higher.  This 
meant  a  profit  of  about  $i  50  per  bond,  exclusively  reserved  to  the 
banking  syndicate.  Moreover,  a  cumulative  process  was  evi- 
dently involved,  inasmuch  as  the  greater  the  amount  of  conver- 
sion, placing  bonds  ahead  of  stock,  the  less  was  the  preferred 
stock  on  the  market  worth.  This  scandalous  condition  of 
affairs  finally  induced  the  company  to  terminate  the  contract 
and  limit  the  amount  of  conversion  to  $150,000,000  in  place  of 
$200,000,000  as  originally  planned.2 

The  net  results  of  the  transaction  would  seem  to  be  as  follows. 
Of  the  $50,000,000  bonds  originally  to  be  sold  for  cash,  none  were 
taken  by  the  public.  The  price  never  rose  above  95,  while  they 
were  offered  at  par.  The  syndicate  assumed  its  guarantee  of 
$20,000,000  at  par,  but  only  a  small  fraction  of  this  offer  of  cash 
had  been  taken  by  the  company  when  the  contract  was  cancelled. 
As  to  the  $200,000,000  of  preferred  stock  to  be  converted  (after- 
wards reduced  to  Si  50,000,000), outside  shareholders  whose  rights 
expired  in  May  availed  themselves  of  the  privilege  to  an  amount 
variously  estimated  at  from  $35,000,000  to  $50,000,000.  The 
syndicate,  compelled  by  its  guarantee  to  convert  $80,000,000, 
must  therefore  have  taken  care  of  the  balance  of  $150,000,000. 
This  last  was  the  limit  finally  set  by  the  company  on  terminating 
the  contract  upon  completion  in  November,  1903.  The  results  to 
the  United  States  Steel  Corporation  of  the  entire  transaction  were 
then  twofold.  At  best,  an  insignificant  amount  of  cash  was  pro- 
vided, not  all  of  this  being  taken  as  offered.  Secondly,  an  evi- 
dent saving  in  the  annual  charges  wras  made,  determined  by 
the  difference  between  the  dividends  on  old  preferred  stock  at 

1  Official  documents  are  reprinted  in  Moody,  Truth  about  the  Trusts,  p.  185. 

2  A  searching  analysis  of  this  phase  of  the  matter  is  given  by  A.  D.  Xoycs  in 
1'Jie  Forum,  January,   1904,  pp.  368  et  sc-tj. 


LATER   HISTORY   OF   THE    BOND    CONVERSION       181 

7  per  cent  and  the  interest  at  5  per  cent  on  the  new  bonds.  But  as 
an  offset  to  this,  as  previously  shown,  was  the  fact  that  the  new 
bonds  were  a  fixed  charge  with  foreclosure  rights,  while  the  divi- 
dend payments  were  contingent  upon  earnings.  There  remains, 
then,  for  discussion  only  the  amount  of  profit  which  must  have 
accrued  to  the  syndicate,  many  of  whom  were  directors  in  the  com- 
pany ;  a  profit  which,  had  no  options  been  given  to  the  syndi- 
cate, could  have  been  made  by  the  Corporation  itself.  As  a 
loss  must  be  reckoned  the  sale  of  the  bonds  at  figures  ranging 
from  95  down  to  75,  such  bonds  having  been  taken  at  par. 
On  the  other  hand,  profits  arose  from  two  sources.  The  cash 
commission  at  4  per  cent  on  $170,000,000  of  the  new  bonds  was 
considerable  and  certain.  In  addition  to  this  came  the  exclusive 
privilege  after  May,  1903,  of  converting  the  stock  into  bonds 
at  a  margin  of  difference  vastly  greater  than  could  have  been  con- 
templated when  the  contract  was  drawn.  Whatever,  legally,  the 
judgment  of  the  courts  may  have  been,  as  hereinbefore  described, 
there  can  be  no  doubt  that  from  a  fiscal  point  of  view  the  en- 
tire operation  betrayed  a  disregard  of  the  principles  of  sound 
finance  and  even  of  common  honesty  and  fair  dealing  with  the 
stockholders. 

WILLIAM  Z.  RIPLEY. 


IX 

UNITED   STATES    SHIPBUILDING   COMPANY1 

INCORPORATION 

THE  United  States  Shipbuilding  Company  was  incorporated 
on  June  17,  1902,  under  the  laws  of  the  state  of  New 
Jersey.  The  incorporators  were  Howard  K.  Wood,  Horace  S. 
Gould,  and  Kenneth  K.  McLaren.  .  .  .  The  incorporators 
collectively  subscribed  for  fifteen  shares  of  the  preferred  and 
fifteen  shares  of  the  common  stock  of  the  company. 

On  June  24,  1902,  the  incorporators  above  named,  constituting 
the  stockholders  of  the  company,  held  their  first  meeting.  .  .  . 
At  this  meeting  Frederic  K.  Seward  was  elected  a  director  for 
one  year,  Raymond  Newman  was  elected  a  director  for  two 
years,  and  Louis  B.  Dailey  was  elected  a  director  for  three 
years,  the  minutes  of  the  company  reciting  that  Howard  K. 
Wood,  one  of  the  incorporators  and  subscribers  to  the  stock,  had 
assigned  his  right  to  one  share  of  common  stock  to  each  of  the 
persons  above  named  to  qualify  them  as  directors.  No  stock  of 
the  United  States  Shipbuilding  Company,  however,  was  issued 
to  or  placed  in  the  name  of  these  directors,  so  far  as  the  records 
of  the  company  disclose. 

On  the  said  24th  day  of  June,  1902,  the  first  meeting  of  the 
directors  of  the  United  States  Shipbuilding  Company  was  held. 
At  this  meeting  there  were  present  Louis  B.  Dailey,  Raymond 
Newman,  and  Frederic  K.  Seward,  being  all  of  the  directors. 
The  minutes  recite  that  the  Board  proceeded  to  the  election  of 
officers  for  the  ensuing  year,  and,  ballots  having  been  cast  and 
counted,  it  was  found  that  Raymond  Newman  had  been  elected 


UNITED   STATES   SHIPBUILDING    COMPANY          183 

president;  Louis  B.  Dailey,  vice-president;  and  Frederic  K. 
Seward,  secretary  and  treasurer.  The  persons  above  named  as 
incorporators  were  ...  all  connected  with  the  Corporation 
Trust  Company  of  New  Jersey  as  officers  or  otherwise,  and  the 
place  of  residence  above  stated  being  the  New  Jersey  office  of 
said  Trust  Company.  The  directors  were  also  employees  of 
said  company. 

At  this  meeting  of  the  directors  an  offer  was  received  from 
one  John  \V.  Young,  of  which  the  following  is  a  copy  : 

OFFER  OF  PROMOTERS 

NEW  YORK,  June  24,  1902. 
To  THE  BOARD  OF  DIRECTORS,  etc., 

I  hereby  offer  to  convey,  sell,  etc.,  .  .  .  unto  your  Company  for  the 
consideration  hereinafter  stated,  the  following  property,  viz.  : 

1 i )  All  of  the  capital  stock  of  the  Union  Iron  Works  of  San  Francisco, 
Cal.,   .   .   .  together  with  all  of  its  property,  real  and  personal,  business 
and  good  will  as  a  going  concern,  I  hereby  agreeing  that  this  corporation 
has  no  bonds  out  and  no  indebtedness  except  current  accounts,  etc. 

Messrs.  Henry  T.  Scott  and  Irving  M.  Scott  have  agreed  with  me 
...  to  enter  into  the  usual  contract  with  your  Company  not  to  compete 
with  it  in  its  business,  and  not  to  employ  their  capital  ...  for  the 
period  of  ten  years. 

This  offer  of  the  stock  and  property  of  the  Union  Iron  Works  is  made 
also  upon  the  following  express  conditions,  viz.  :  That  your  Company 
shall  enter  into  a  contract  extending  over  a  period  of  five  years  with 
Messrs.  .  .  .  ,  now  connected  with  the  management  of  the  Union  Iron 
Works,  to  act  as  officers  or  managers  ...  for  this  period  of  five  years 
at  an  annual  salary  to  be  paid  to  each  of  Sio,ooo,  etc. 

(2)  The  entire  capital  stock  of  the  Marian  &  Hollingsworth  Company 
of  Wilmington,  Del.,  etc. 

(3)  Also  the  entire  capital  stock  of  the  Eastern  Shipbuilding  Com- 
pany, etc. 

(4)  All  of  the  real  estate  of  the  Camla  Manufacturing  Company,  etc. 
(^)    Also  the  entire  capital  stock  of  the  Crescent  Shipyard  Companv 

.  .  .  and  the  business  of  the  Crescent  shipyards  heretofore  conducted 
by  Lewis  Nixon. 

#  *  *  *  *  •*  * 

(6)  Also  the  entire  capital  stock  of  the  Samuel  L.  Moore  Cv  S  TIS' 
Companv. 


1 84  TRUSTS,   POOLS  AND   CORPORATIONS 

(7)  Also  the  entire  capital  stock  of  the  Bath  Iron  Works  .  .  .  and 
of  the  Hyde  Windlass  Company.  .  .  . 

(8)  Also  300,000  shares  out  of  an  entire  issue  of  300,000  shares  of 
the  capital  stock  of  the  Bethlehem  Steel  Company  .  .  .  engaged  in  the 
business  of  manufacturing  and  dealing  in  iron  and  steel  and  the  products 
thereof. 

I  will  also  pay,  or  cause  to  be  paid,  to  your  Company  $1.500,000 
for  working  capital,  and  will  also  deliver,  or  cause  to  be  paid  and  de- 
livered to  your  Treasurer  or  other  nominee,  the  following  securities,  viz.  : 
$1,500,000  in  par  value  5  per  cent,  thirty-year  gold  bonds  of  United 
States  Shipbuilding  Company,  the  same  to  be  held  as  Treasury  assets 
and  disposed  of  for  working  capital  or  other  purposes  of  the  Company 
as  your  Board  of  Directors  shall  hereafter  determine. 

It  is  a  further  condition  of  this  offer  that  in  cases  where  your  Company 
shall  acquire  both  capital  stock  and  properties  of  any  of  the  corporations 
included  in  this  offer,  you  shall  guarantee,  or  otherwise  assume,  any 
promissory  notes  or  other  obligations  which  it  may  be  necessary  or 
desirable  to  put  into  the  treasuries  of  such  corporation  or  corporations 
for  the  protection  of  their  creditors,  or  to  avoid  violation  of  the  statutes 
of  any  state  or  states. 

I  will  accept  in  full  consideration  for  the  conveyances  .  .  .  above 
offered  to  be  made  $19,998,500  in  par  value  of  the  full  paid  and  non- 
assessable preferred  stock  of  your  Company,  $24,998,500  in  par  value 
of  the  full  paid  and  non-assessable  common  stock  of  your  Company, 
$16,000,000  par  value  of  the  first  mortgage  five  per  cent  sinking  fund 
thirty-year  gold  bonds,  Series  A,  of  your  Company  secured  by  a  mort- 
gage which  will  be  a  first  lien  upon  all  the  property  and  plants  of  the 
Union  Iron  Works,  etc.  (above  named  companies)  ;  also  $10,000,000 
par  value  of  the  5  per  cent  twenty-year  gold  bonds  to  be  made  by  your 
Company  and  to  be  secured  by  a  mortgage  upon  the  shares  of  stock 
of  the  Bethlehem  Steel  Company  and  otherwise,  as  hereinafter  stated. 

In  case  you  accept  the  offer  of  the  stock  of  the  Bethlehem  Steel 
Company  the  purchase  must  be  made  upon  the  following  conditions  : 

(i)  The  stock  ...  is  to  be  deposited  with  the  New  York  Security 
&  Trust  Company  under  a  mortgage  or  deed  of  trust  which  shall  be  a 
first  lien  upon  the  stock  so  acquired,  and,  subject  to  the  priority  of  the 
mortgage  to  secure  said  Si 6.000.000  of  bonds,  shall  be  a  lien  upon  the 
property  and  plants  covered  by  said  $16.000.000  mortgage.  .  .  .  The 
holders  of  each  Si.ooo  par  value  of  said  bonds  to  have  the  same  voting 
power  as  the  holders  of  each  $1,000  par  value  of  the  stock  of  your 
Company. 


UNITED   STATES   SHIPBUILDING   COMPANY          185 

(2)  For  the  purpose  of  further  securing  said  issue  of  $10,000,000 
of  bonds,  your  Company  shall  also  procure  to  be  executed  and  delivered 
to  the  New  York  Security  &  Trust  Company,  the  single  bond  of  the 
Bethlehem  Steel  Company  payable  to  said  Trust  Company  for  the  sum 
of  $10,000,000  gold  coin,  with  interest  thereon  at  the  rate  of  fi.ve  per 
centum  .   .  .,  conditioned   for   the   due   payment  of  the  principal   and 
interest  of  said  issue  of  $10,000,000  of  bonds,  etc. 

(3)  That  an  agreement  shall  be  executed  between   the   Bethlehem 
Steel  Company  and  your  Company,  by  which  said  agreement  your  com- 
pany  shall    undertake   to  guarantee   so   long  as   any   of   said   issue   of 
$10,000,000  bonds  are  outstanding,  that  the  Bethlehem  Steel  Company 
shall  pay  dividends  upon  its  capital  stock  at  the  rate  of  Three  Dollars 
per  share   per  year,  aggregating   an   annual    dividend    contribution   of 
$900,000,   and    for   that   purpose  that   your  Company  will   supply   and 
furnish  said  Bethlehem  Steel  Company  .  .  .  business  and  .  .  .  means 
of  earning  to  enable  it  to  pay  said  annual  dividends  ...  or  advance 
sufficient  money  .  .  .  to  make  such  annual  dividend  payments  which 
may  be  credited  on  any  business  or  work  which  said  Bethlehem  Steel 
Company  may  thereafter  have  for  or  on  account  of  your  Company.     Said 
agreement  shall  further  provide  that  so   long  as  any  of  said   issue  of 
$10,000,000  bonds  remain  outstanding,  said  Bethlehem  Steel  Company 
shall  be  protected  in  keeping  on  hand  and  maintaining  cash  or  cash 
assets  of  not  less  than  $4,000,000  cash  value  over  and  above  its  current 
business   liabilities   (not   including   its    present   and   projected    issue  of 
bonds)  as  its  working  capital,  no  part  of  which  shall  at  any  time  be  used 
or  applied  towards  the  payments  of  dividends   or   for  purposes  other 
than  the  operation  and  conduct  of  the  business  of  said  Bethlehem  Steel 
Company. 

(4)  That  so  long  as  any  of  said  $10,000,000  bonds  are  outstanding 
said  Hethlehem  Steel  Company  shall  always  remain  an  independent  and 
distinct  corporation,  and  shall  not  be  merged  in  or  consolidated  .  .  . 
unless  .  .  .  requested  or  consented  to  by  the  holders  of  not  less  than 
75  per  cent  of  said  outstanding  bonds. 

(5)  That  your  Company  may  at  any  time  pay  all  of  said  outstanding 
bonds  as  an  entirety  by  depositing  a  sum  equal  to  the  par  value   .  .  . 
with   interest    ...   to   the    New   York   Security  «!v:  Trust  Company  as 
trustee. 

I  will  cause  to  be  delivered  to  your  Company  suitable  deeds,  bills  of 
sale  and  transfers,  etc. 

******** 

(Signed)         IOHN  \V.  YOUNG. 


1 86  TRUSTS,   POOLS   AND   CORPORATIONS 

Upon  the  receipt  of  this  offer  the  directors  above  named,  holding 
no  stock  whatever  in  the  Company,  but  at  most  a  mere  subscriptive 
right,  by  assignment,  to  one  share  each,  adopted  the  following 
resolution : 

ACCEPTANCE  BY  COMPANY 

Whereas,  John  W.  Young  has  offered  to  convey,  sell,  etc., 
.  .  . ;  and, 

Whereas,  In  the  judgment  of  this  Board  the  value  of  the 
properties  so  offered  ...  is  at  least  the  par  value  of  the  stocks 
and  bonds  of  this  Company  proposed  to  be  issued  therefor,  to 
wit,  the  sum  of  $70,997, ooo,  and  said  properties  are  necessary 
for  the  business  of  this  Company ; 

Resolved,  That  said  offer  be  and  the  same  is  hereby  accepted, 
etc.,  .  .  . 

Further  resolved,  That  for  the  purpose  of  enabling  this  Com- 
pany to  accept  the  foregoing  offer,  it  shall  as  soon  as  practicable 
take  the  steps  required  by  law  for  the  increase  of  its  authorized 
capital  stock  from  thirty  shares  of  $100  each  ...  to  four 
hundred  and  fifty  thousand  shares  of  Sioo  each,  two  hundred 
thousand  shares  of  which  shall  be  preferred  stock,  and  two 
hundred  and  fifty  thousand  shares  of  which  shall  be  common 
stock,  making  a  total  authorized  capital  stock  of  $45,000,000.  .  .  . 

Further  resolved,  That  the  officers  of  this  Company  be,  and 
they  hereby  are  authorized  and  directed  to  make  ...  to  the 
Mercantile  Trust  Company  as  Trustee,  a  mortgage  or  deed  of 
trust  upon  the  properties  purchased  pursuant  to  the  offer  of 
said  John  W.  Young  (exclusive  of  the  shares  of  stock  of  the 
Bethlehem  Steel  Company),  to  secure  the  payment  of  $16,000,000 
par  value  of  first  mortgage  5  per  cent  thirty-year  sinking  fund 
gold  bonds,  etc.,  .  .  . 

Further  resolved,  That  the  proper  officers  of  this  Company  be 
and  they  hereby  are  authorized  and  directed  to  make  ...  a 
mortgage  or  deed  of  trust  to  the  New  York  Security  &  Trust 
Company  as  Trustee,  of  the  shares  of  the  capital  stock  of  the 
Bethlehem  Steel  Company  ...  to  secure  the  payment  of 
$10,000,000  par  value  of  the  5  per  cent  twenty-year  gold  bonds 
of  this  Company,  which  mortgage  shall  contain  the  provisions 
required  under  the  terms  of  said  offer,  etc.,  .  .  . 


UNITED   STATES  SHIPBUILDING   COMPANY          187 

Further  resolved,  That  the  officers  of  this  Company  are  hereby 
authorized  to  execute,  issue,  and  deliver  to  the  said  Young  .  .  . 
the  first  mortgage  .  .  .  gold  bonds  of  this  Company  of  the 
aggregate  par  value  of  $16,000,000,  .  .  .  $10,000,000  and  cer- 
tificates for  199,985  shares  of  the  preferred  capital  stock  .  .  . 
and  for  249,985  shares  of  the  common  capital  stock,  etc. 

INCREASE  OF  CAPITAL  STOCK 

On  the  same  day,  to  wit,  the  twenty-fourth  day  of  June,  .  .  . 
a  meeting  of  the  stockholders  of  said  Company  was  held  for 
the  purpose  of  authorizing  and  increasing  the  capital  stock 
of  the  United  States  Shipbuilding  Company  and  of  considering 
and  acting  upon  the  offer  of  said  John  W.  Young,  There  were 
present  Frederic  K.  Seward,  Louis  B.  Dailey,  Kenneth  K. 
McLaren,  Horace  S.  Gould,  Howard  K.  Wood,  and  Raymond 
Newman,  claiming  to  be  holders  of  fifteen  shares  of  preferred 
and  fifteen  shares  of  common  stock  of  the  United  States  Ship- 
building Company,  being  all  the  capital  stock  of  said  Company. 
At  this  meeting  the  following  resolution  was  adopted  : 

Resolved,  That  the  action  of  the  Board  of  Directors  ...  be 
.  .  .  approved,  ratified,  and  confirmed,  etc. 

At  a  meeting  of  the  Board  of  Directors  of  the  United  States 
Shipbuilding  Company  held  on  July  31,  1902,  the  following 
resolution  was  adopted  : 

The  Board  of  Directors,  etc.,  do  hereby  resolve  and  declare 
that  it  is  advisable  that  the  capital  stock  of  this  Company  be 
changed  from  thirty  shares  ...  to  four  hundred  and  fifty 
thousand  shares  ...  of  capital  stock,  etc. 


PURCHASE  OF  SUBSIDIARY  PLANTS 

Between  the  fifth  day  of  August,  1902,  and  the  twelfth  day 
of  August,  1902,  in  evident  compliance  with  the  offer  of  said 
John  \V.  Young  and  the  acceptance  thereof  .  .  .  the  companies 
.  .  .  conveyed  to  the  United  States  Shipbuilding  Company  all 
their  real  and  personal  propertv.  .  .  . 


1 88  TRUSTS,   POOLS  AND   CORPORATIONS 

LEASES  TO  SUBSIDIARY  COMPANIES 

Your  Receiver  further  reports  that  after  the  delivery  of  said 
deeds  .  .  .  leases  were  entered  into  between  the  United  States 
Shipbuilding  Company  and  the  (various  companies  hereinbefore 
named).  .  .  .  By  the  terms  of  these  leases  "  all  the  yards, 
docks,  and  plant,"  etc.,  were  leased  to  the  above  named  con- 
stituent companies  "at  the  yearly  rent  or  sum  of  the  net  profits 
of  the  said  party  of  the  second  part  in  its  business  during  the 
term  of  this  lease."  ...  In  the  Union  Iron  Works  lease  the 
entire  plant  and  property  were  leased  for  one  year  to  the  Union 
Iron  Works  for  the  nominal  rental  of  one  dollar.  All  such  leases 
were  terminable  on  five  days'  notice. 

ALLEGED  BASIS  OF  DIRECTORS'  ACTIONS 

The  resolution  of  the  Board  of  Directors  of  the  United  States 
Shipbuilding  Company  accepting  the  offer  of  John  W.  Young, 
above  set  forth,  was  stated  by  said  Board  in  its  minutes  to  be 
based  upon  a  report  in  writing  from  Messrs.  W.  T.  Simpson, 
Fellow  Institute  Accounts,  New  York,  and  Riddell  and  Common, 
Chartered  Accountants,  on  the  condition  of  the  business  of  the 
several  companies  mentioned  in  said  offer,  excepting  the  Bethle- 
hem Steel  Company.  This  report  is  alleged  to  have  certified, 
among  other  things,  that  the  contracts  of  the  constituent  com- 
panies for  construction  then  in  hand  amounted  to  over  thirty-six 
millions  of  dollars.  That  the  time  necessary  to  complete  the 
work  contracted  for  averaged  about  eighteen  months  from  Jan- 
uary first,  nineteen  hundred  and  two,  and  that  the  estimated  net 
profits  thereon  had  been  calculated  at  over  five  millions  of  dol- 
lars. That  new  work  was  being  constantly  offered,  and  this 
new  work,  replacing  completed  contracts  from  time  to  time, 
should  result  in  the  realization  of  an  average  annual  profit  on 
work  in  hand  and  in  sight  of  two  million  two  hundred  and 
twenty-five  thousand  dollars. 

With  reference  to  the  Bethlehem  Steel  Company,  the  minutes 
of  the  Board  of  Directors  recite  that  Messrs.  Jones,  Cxsar  & 
Company,  chartered  accountants,  had  been  investigating  the 
affairs  of  the  Bethlehem  Steel  Company,  and  had  made  a  report 


UNITED   STATES   SHIPBUILDING    COMPANY          189 

that  the  company  was  earning  at  the  rate  of  one  million  eight 
hundred  thousand  dollars  per  year ;  that  it  had  a  working  capi- 
tal of  over  four  millions  of  dollars,  and  that  it  had  contracts  in 
hand  sufficient  for  its  full  running  capacity  for  three  years.  In 
reliance  upon  these  alleged  reports,  and  without  knowledge  of, 
or  investigation  into,  the  merits  of  the  properties,  the  resolution 
in  question  was  adopted. 

ACTS  OF  THE  DIRECTORS 

A  comparison  of  the  figures  alleged  to  have  been  relied  upon 
by  the  Board  of  Directors  in  accepting  the  offer  of  John  W. 
Young,  with  the  true  figures  ascertained  from  an  examination 
of  the  subsidiary  companies  subsequent  to  the  purchase  of  said 
plants,  discloses  so  great  a  variance  as  to  impel  the  belief  that 
the  figures  contained  in  the  minutes  were  wilfully  misstated.  It 
is  extremely  doubtful  whether  any  report  was  submitted  by  any 
accountants  made  as  of  that  time,  as  the  minutes  recite.  In  a 
certain  Prospectus  marked  "  Private  and  Confidential,"  bearing 
date  the  iQth  clay  of  April,  1902,  there  is  contained  a  letter  pur- 
porting to  be  signed  by  Messrs.  Simpson  and  Riddel]  and  Common, 
under  date  of  January  24th,  1902,  which  letter  would  seem  to 
serve  as  a  basis  to  a  certain  extent  for  the  allegation  in  the  min- 
utes of  the  Board  of  Directors.  If  the  examination  of  these 
accountants  was  made  as  of  January  ist,  1902,  as  the  letter 
would  imply,  it  must  have  been  of  the  most  superficial  kind. 
The  letter  in  question  makes  such  exaggerated  representations 
with  reference  to  the  profits,  present  and  prospective,  as  to  make 
it  absolutely  worthless  as  a  guide  in  ascertaining  the  real  con- 
dition of  the  plants.  It  is  entirely  refuted  by  their  later  reports 
and  detailed  statements  made  as  of  June  3<Dth  and  July  3ist,  1902. 

Your  Receiver  has  seen  and  inspected  the  statements  made  by 
these  accountants  as  of  June  thirtieth,  nineteen  hundred  and 
two,  and  July  thirty-first,  nineteen  hundred  and  two,  and  finds 
nothing  therein  to  support  the  statements  contained  in  the 
minutes  of  the  Board  of  Directors. 

The  statement  of  Messrs.  Simpson  and  Riddell  and  Common 
of  the  condition  of  the  subsidiary  plants  as  of  June  thirtieth, 
nineteen  hundred  and  two,  contains,  among  other  things,  the 
following  figures  : 


IQO  TRUSTS,   POOLS  AND   CORPORATIONS 

1.  Contract  price      ..........     $34,377,408.70 

2.  Value  of  work  done  under  said  contracts  up  to  June  30,  1902      .       13,771,768.96 

3.  Value  of  work  to  be  done  under  said  contracts  subsequent  to     

June  30,  1902 .     $20,605,639.74 

The  report  of  these  accountants  also  contained  a  statement 
of  the  volume  of  business  done  by  the  constituent  companies 
for  the  three  years  ending  June  thirtieth,  nineteen  hundred  and 
two,  on  which  the  profit  was  shown  to  be  about  ten  per  cent. 
The  report  also  shows  that  the  contracts  remaining  unfinished 
on  June  thirtieth,  nineteen  hundred  and  two,  would  require  three 
years  for  their  completion. 

From  this  report  the  following  facts  clearly  appear : 

1.  That  the  amount   of   contracts    on    hand  June  thirtieth, 
nineteen  hundred  and  two,  instead  of  being  Thirty-six  Millions 
of  Dollars,  as  recited  in  the  minutes  of  the  Board  of  Directors, 
was  $15,394,360.26  less  than  the  amount  therein  stated. 

2.  That  it  would  take  three   years  to  earn  whatever  profit 
was  involved  in  these  contracts,  instead  of  eighteen  months, 
as  alleged  in  the  minutes. 

3.  That  the  profits  on  such  contracts,  instead  of  amounting 
to  $5,000,000,  as  the  minutes  recite,  basing  the  estimate  upon 
the  past  earnings  contained  in  the  report,  would  be  about  two 
millions  of  dollars  ;  and, 

4.  That  the  statement  that  the  average  annual  profit  on  work 
in  hand  and  in  sight  of  the  constituent  companies,  exclusive  of 
the  Bethlehem  Steel  Company,  was  $2,225,000,  appears  to  have 
no  more  substantial  basis  than  the  wildest  conjecture. 

AMOUNT   OF   CONTRACTS,   JULY   31,  1902 

Your  Receiver  has  caused  to  be  prepared  a  statement  showing  the 
contracts  in  furce  on  the  3ist  day  of  July,  1902,  the  portion 
thereof  completed,  the  balance  remaining  uncompleted,  and  the 
estimated  profit  thereon,  based  upon  the  highest  possible  estimate 
of  earning-;,  which  is  annexed  hereto  marked  "Schedule  No.  2," 
and  made  a  part  thereof.  From  this  statement  it  appears  that 
the  face  value  of  the  contracts  on  hand,  including  extras,  on 

July  31,  1902,  was       .  $34,097,739.23 

The  value  of  work  done  on  said  contracts  up  to  July  31,  1902,  was  .       14,295,195.15 
Leaving  the  value   of  the  uncompleted  work  on  said  contracts  on 

July  31,  1902 $19,802,544.08 


UNITED   STATES   SHIPBUILDING   COMPANY          191 

ESTIMATED  EARNINGS  ON  SUCH  CONTRACTS 

Adopting  the  figures  of  the  accountants  and  estimating  profit 
on  the  basis  of  percentage  of  completion  reported  by  them  and 
the  actual  cost  of  such  percentage,  the  highest  possible  estimate 
of  earnings  on  the  balance  of  the  contracts  to  be  completed 
would  be  $2,203,269.83,  as  appears  from  said  "Schedule  No.  2." 

An  examination  of  the  books  of  the  Company,  however,  with 
care  and  the  exercise  of  some  intelligence,  and  adjusting  the 
amount  of  the  contracts  at  corrected  figures,  would  have  shown' 
that  there  was  no  basis  for  the  foregoing  figures,  but  that  there 
might  be  justification  for  an  estimated  profit  of  $1,660,021.59, 
as  appears  from  the  statement  hereto  annexed,  made  a  part  here- 
of and  marked  "  Schedule  No.  3." 

An  examination  as  of  August  i,  1903,  however,  with  the  past 
year's  work  as  a  basis,  and  allowing  for  changes  in  extras,  dis- 
closes another  set  of  figures  and  shows  that  the  profit  on  such 
uncompleted  contracts  cannot  exceed  the  sum  of  $1,078,261.42, 
as  appears  from  the  statement  hereto  annexed,  made  a  part 
hereof  and  marked  "  Schedule  No.  4." 

From  this  latter  Schedule,  which  is  based  upon  the  actual 
cost  of  the  work,  so  far  as  ascertainable,  a  situation  is  disclosed 
so  much  at  variance  with  the  figures  alleged  to  have  been 
relied  upon  by  the  Board  of  Directors  as  to  lead  to  the  belief 
that  the  minutes  of  the  Board  of  Directors  in  this  respect  must 
have  been  wilfully  falsified.  The  Five  Millions  of  profits  dwindle 
to  about  One  Million;  the  contracts  therein  referred  to  will  not 
be  completed  for  upwards  of  three  years,  and,  judging  from  past 
experiences,  it  is  safe  to  say  that  this  estimated  profit  will  suffer 
great  depreciation  before  the  completion  of  the  contracts. 

WORKING  CAPACITY  OF  PLANTS  IN  RELATION  TO  EARNINGS 

So  far  as  your  Receiver  is  able  to  ascertain,  the  full  capacity 
of  the  yards,  exclusive  of  the  Bethlehem  Steel  Company,  is 
about  fourteen  million  dollars  of  work  annually,  while  twelve 
million  dollars  is  an  average  volume  of  work.  From  the  figures 
contained  in  the  report  of  the  Messrs.  Simpson  and  Ricldell  and 


192  TRUSTS,   POOLS  AND   CORPORATIONS 

Common,  it  appears  that  the  average  profit  of  the  yards  for  the 
three  years  preceding  their  purchase  by  the  United  States  Ship- 
building Company  did  not  exceed  ten  per  cent.  Upon  this  basis 
the  average  annual  profit  derived  from  the  yards,  on  the  basis 
of  the  capacity  above  stated,  would  not  exceed  a  million  four 
hundred  thousand  dollars. 


EARNINGS  FOR  THE  YEAR  ENDING  AUGUST  i,   1903 

This  basis,  however,  is  no  guide  to  the  actual  earnings  of 
the  constituent  companies.  After  being  in  operation  for  one 
year  under  the  control  of  the  United  States  Shipbuilding  Com- 
pany, the  earnings  of  the  constituent  companies,  exclusive  of 
the  Bethlehem  Steel  Company,  instead  of  being  $2,225,000,  as 
alleged  by  the  Directors,  or  $1,400,000,  as  figured  on  the  above 
basis  of  ten  per  cent,  did  not  exceed  $833,458.74,  as  appears 
from  "  Schedule  5,"  hereto  annexed  and  made  a  part  hereof. 

It  has  been  suggested  that  the  poor  showing  in  regard  to 
earnings  is  due  to  the  increased  cost  of  labor  and  material 
during  the  past  year.  It  is  true  that  the  cost  of  labor  was 
greater  during  the  past  year  than  the  previous  years,  and  that 
there  were  some  losses  occasioned  by  strikes ;  but  it  is  also  true 
that,  by  reason  of  the  combination  of  all  the  yards  under  one 
management  and  the  attempted  control  thereof  by  the  United 
States  Shipbuilding  Company,  there  should  have  been  a  great 
reduction  in  the  management  expenses.  This  reduction  in 
expense,  however,  did  not  come  to  pass,  and  one  reason  for  it 
may  be  found  upon  an  examination  of  the  offer  of  Young,  above 
set  forth.  In  this  offer  it  will  be  found  that  in  the  case  of  the 
Union  Iron  Works,  Eastern  Shipbuilding  Company,  Samuel  L. 
Moore  &  Sons'  Company,  Bath  Iron  Works,  and  the  Hyde 
Windlass  Company,  it  was  provided  that  the  United  States 
Shipbuilding  Company  should  enter  into  contracts  with  certain 
persons  therein  named  for  upwards  of  five  years  at  salaries, 
in  many  instances,  greater  than  the  earnings  of  the  subsidiary 
company  would  warrant.  The  acceptance  of  this  offer,  there- 
fore, with  these  conditions  imposed,  not  only  reduced  the  earn- 
ings of  the  subsidiary  companies,  but  left  the  officers  in  charge 


UNITED   STATES   SHIPBUILDING   COMPANY          193 

thereof  practically  free  from  interference  by  the  Board  of 
Directors  of  the  United  States  Shipbuilding  Company  for  a 
period  of  five  years,  a  fact  that  must  necessarily  have  had  con- 
siderable influence  upon  the  management  and  earnings  of  the 
individual  plants.  This  fact,  however,  does  not  wholly  explain 
the  failure  of  the  earnings  of  the  constituent  companies  to  reach 
the  amount  of  earnings  estimated  in  the  preliminary  reports. 
The  real  reason  why  the  earnings  fell  below  the  anticipated 
profits  was  because  previous  alleged  earnings  had  been  figured 
upon  a  percentage  of  completion  of  contracts,  which  percentage 
in  many  instances  was  erroneous.  For  instance,  in  the  case  of 
the  torpedo  boats  "  Nicholson  "  and  "  O'Brien,"  it  was  stated 
that  these  boats  were  fully  completed.  As  a  matter  of  fact 
there  was  subsequently  expended  thereon  the  sum  of  $56,271.04, 
and  it  is  estimated  that  upwards  of  $20,000  is  still  needed  to 
complete  these  boats.  Your  Receiver,  therefore,  respectfully 
submits  that  the  method  of  arriving  at  profits  earned  previous 
to  the  combination  was  practically  worthless  for  the  purpose  of 
ascertaining  accurate  results,  and  led  to  the  inaccuracies  in  the 
estimates  for  the  future. 

BETHLEHEM  STEEL  COMPANY 

In  regard  to  the  Bethlehem  Steel  Company,  the  minutes  of  the 
Board  of  Directors  with  reference  to  the  offer  of  the  said  Young, 
recite  that  an  investigation  of  the  affairs  of  that  company  dis- 
closes that  it  was  earning  at  the  rate  of  $1,800,000  a  year,  and 
that  it  had  a  working  capital  of  over  $4.000,000.  For  the  two 
years  preceding  the  adoption  of  the  resolution  in  question  by  the 
directors  the  earnings  of  the  Bethlehem  Steel  Company  for  the 
fiscal  year  ending  the  thirtieth  day  of  April  were  as  follows  : 


From  these  figures,  as  to  the  earnings  of  the  Bethlehem  Steel 
Company,  which  are  made  up  from  the  report  submitted  by  the 
Bethlehem  Steel  Company,  it  appears  that  the  earnings  of  that 
company  at  the  time  of  the  adoption  of  the  resolution  were 
much  below  the  amount  alleged  in  the  minutes  of  the  Board  of 


194  TRUSTS,   POOLS  AND   CORPORATIONS 

Directors  of  the  United  States  Shipbuilding  Company,  and  that 
there  was  then  no  justification  for  the  use  of  such  figures. 

It  also  appears  that  the  working  capital  of  the  Bethlehem  Steel 
Company  at  the  close  of  their  fiscal  year  on  the  thirtieth  day  of 
April,  nineteen  hundred  and  two,  was  not  over  $4,000,000,  but  was 
at  least  $250,000  less  than  such  amount,  as  hereinafter  set  forth. 

WORKING  CAPITAL 

From  the  report  of  Messrs.  Simpson  and  Riddell  and  Common, 
as  of  July  3  ist,  1902,  not  made,  however,  until  after  the  proper- 
ties had  been  acquired  and  paid  for,  it  appears  that  the  working 
capital  of  the  constituent  companies,  exclusive  of  the  Bethlehem 
Steel  Company,  was  $3,278,798.48.  The  figures  making  up  this 
total  were  subsequently  found  to  be  excessive  in  the  case  of 
nearly  every  company,  the  shrinkage  amounting  to  $1,450,367.41, 
so  that  the  working  capital  of  the  constituent  companies  was  but 
$1,828,431.07,  as  appears  from  the  statement  hereto  annexed, 
marked  "  Schedule  No.  6,"  and  made  a  part  hereof.  From  the 
statement  hereto  annexed,  marked  "  Schedule  No.  7,"  and  made 
a  part  hereof,  it  appears  that  with  the  exception  of  the  Union 
Iron  Works,  the  subsidiary  companies,  taken  together,  had 
absolutely  no  working  capital;  but  on  the  contrary  their  liabilities 
exceeded  their  resources  in  the  sum  of  $294,719.33.  By  refer- 
ence to  this  schedule  it  appears  that  the  following  was  the  con- 
dition of  said  companies  at  the  time  of  their  purchase  : 

DEFICIT 
Bath  Iron  Works    .........     $3,518.74 

Crescent  Shipyard  Company  .......  403,192.28 

ITarlan  iS:   Elollingsworth  Co.         ......     73,813.44 

S.  L.  Moore  &  Sons'  Company        ......       5,039.27 


SURPLUS 
Eastern  Shipbuilding  Company      ......     $1,391.34 

Hyde  Windlass  Company       .......   189,453.06 

-  $190,844.40 


Net  Deficit  being  excess  of  Liabilities  over  Assets .          .         .  $294,719.33 

From  an  examination  of  "  Schedules  6  and  7,"  it  will  appear 
that  the  alleged  working  capital  was   provided  largely  by  the 


UNITED    STATES   SHIPBUILDING   COMPANY          195 

Union  Iron  Works,  with  slight  help  from  the  Hyde  Windlass 
Company  and  the  Eastern  Shipbuilding  Company. 

The  amount  of  Accounts  Payable  and  Notes  Payable  of  the 
different  companies  at  the  time  of  their  purchase  by  the  United 
States  Shipbuilding  Company  was  $2,334,987.64.  Of  this  amount 
$2,192,145.98  was  owing  by  the  subsidiary  shipbuilding  com- 
panies other  than  the  Union  Iron  Works,  as  appears  from  said 
"  Schedule  No.  7."  As  the  principal  part  of  the  alleged  work- 
ing capital  above  mentioned  was  confined  to  Union  Iron  Works, 
it  will  appear  that  so  far  as  the  remaining  companies  are  con- 
cerned, when  taken  over  by  the  United  States  Shipbuilding  Com- 
pany, they  not  only  had  no  working  capital,  taken  collectively, 
but  were  in  immediate  need  of  financial  assistance. 

From  the  foregoing  facts,  viewed  not  only  in  the  light  of  sub- 
sequent developments,  but  also  from  the  figures  obtainable  at 
the  time  of  the  incorporation  of  the  United  States  Shipbuilding 
Company,  it  appears  to  have  been  the  intention  of  those  respon- 
sible for  the  statements  and  figures  alleged  to  have  been  relied 
upon  to  mislead  and  deceive  the  investing  public  and  the  then 
present  and  future  creditors  of  the  Company. 

PROSPECTUS 

In  this  connection,  your  Receiver  begs  to  refer  to  the  pro- 
spectus issued  to  the  public,  with  a  view  to  inducing  subscriptions 
for  the  bonds  of  the  United  States  Shipbuilding  Company,  under 
date  of  June  14,  1902.  This  prospectus  seeks  to  invite  the  pub- 
lic to  subscribe  for  nine  millions  of  dollars  of  the  first  mortgage 
5  per  cent  sinking  fund  gold  bonds  of  the  United  States  Ship- 
building Company.  It  recites  that  the  United  States  Shipbuild- 
ing Company  "  has  been  organized  under  the  laws  of  the  State 
of  Xew  Jersey."  It  implies  that  the  total  capital  stock  of  the 
Company  is  twenty  millions  of  dollars,  SiO,OOO,OOO  of  which  is 
preferred  and  810,000.000  common.  It  sets  out  a  list  of  the 
directors  of  the  United  States  Shipbuilding  Company,  number- 
ing ten  in  all.  It  recites  that  the  subsidiary  plants  of  the  Com- 
pany, exclusive  of  the  Bethlehem  Steel  Company,  have  been 
appraised  as  going  concerns  at  twenty  millions  of  dollars;  that 


196  TRUSTS,    POOLS   AND    CORPORATIONS 

these  companies  would  have  a  combined  working  capital  of  more 
than 'five  million  of  dollars;  that  they  have  on  hand  contracts 
for  work  amounting  to  more  than  $36,000,000,  on  which  the 
profits  were  estimated  at  over  $5,000,000. 

Waiving  for  the  present  all  discussion  as  to  the  value  of  the 
plants  as  going  concerns,  a  comparison  of  this  prospectus  with 
the  facts  disclose  the  following  false  and  misleading  statements : 

1.  At  the  date  of  this  prospectus  the  United  States  Ship- 
building Company  had  not  been  incorporated. 

2.  Its  capital  stock  was  never  Twenty  Millions.     Originally 
it  was  Three  Thousand  Dollars  ;  which  amount  was  subsequently 
increased  to  Forty-five  Millions. 

3.  Six  of  the  ten  persons  mentioned  as  directors  in  the  pro- 
spectus were  not  directors  of  the  company,  and  never  have  been. 

4.  The  amount  of  contracts  on  hand  did  not  exceed  $36,000,000, 
their  face  value  being  $34,182,861.94,  but  of  this  amount  a  profit 
was  available  only  on  the  uncompleted  portion  of  the  contracts, 
which  profit,  as  heretofore  shown,  will  not  exceed  $1,078,261.42, 
and  will  take  three  years  to  earn. 

5.  These  companies  did  not  have  a  working  capital  of  more 
than  $5,000,000;   the  figures  of  the  accountants  show  only  a 
working  capital  of  $3,278,798.48.     This  working  capital,  how- 
ever, was  almost  obliterated  by  subsequent  adjustment,  as  here- 
inbefore set  forth. 

6.  The  statement  that  the  profits  on  contract  work  in  hand 
would  be  $5,000,000  was  undeniably  false.      If  it  is  claimed  that 
the  profit  was  estimated  on  the  entire  amount  of  $36,000,000, 
the  answer  to  this  is  that,  admitting  there  was  $36,000,000  worth 
of  contracts  (which  was  not  true),  the  utmost  profit  that  could 
be   looked    for,    according    to    the    figures    of    the   accountants, 
was   $3,600,000.      When  this   prospectus  was  issued,  the  per- 
sons who  were  responsible   for  it   must   have   deliberately  dis- 
regarded figures  which  would  have  shown  that  the  amount  of 
work  still  to  be  done  on  the  contracts  was  but  $20,605,639.74, 
instead  of  $36,000,000,  and  that  upon  such  uncompleted  work 
a  liberal  estimate   would   have   placed   the   earnings   at   only  a 
trifle  over  $2,000,000. 


UNITED    STATES   SHIPBUILDING    COMPANY          197 

VALUE  OF  THE  PLANTS 

The  net  surplus  of  the  various  constituent  companies,  includ- 
ing their  plants,  according  to  the  statement  of  the  accountants, 
as  shown  by  the  books  of  said  companies,  were  on  the  3ist  day 
of  July,  1902,  as  follows  : 

Bath  Iron  Works     .......  $827,316.19 

Hyde  Windlass  Co. 358,121.29 

Crescent  Shipyard  Co.      ......  470,583.99 

Samuel  L.  Moore  &  Sans'  Co.           ....  404,788.88 

Eastern  Shipbuilding  Co.         .          .         .     •     .          .  237,278.53 

Harlan  &  Hollingsworth  Co.    .....  1,294,767.16 

Union  Iron  Works  .......  4>3°3>378.97 

Total $7,896,235.01 

Bethlehem  Steel  Co.  (deducting  underlying  mortgages)     4,245,28 1.25 
Canda  Manufacturing  Co.  (estimated)     .         .         .  300,000.00 

Total $12,441,516.26 

For  this  property  the  directors  of  the  United  States  Ship- 
building Company  parted  with  the  following  obligations  of  that 
company  : 

Preferred  stock  of  the  U.  S.  S.  Co $19,998,500 

Common  stock  of  the  U.  S.  S.  Co.    ....       24,998,500 

First  mortgage  5  per  cent  bonds      ....        16,000,000 

Twenty-year  gold  bonds  ......        10,000,000 

Total $70,997,000.00 

There  was  returned  to  the  company,  however, 
the  following  cash  and  securities  : 

Cash $1,500,000 

First  mortgage  bonds       ......          1,500,000 

Total 

Total  bonds  and  stock  paid  by  Shipbuilding  com- 
pany's directors  for  the  subsidiary  plants     . 

In  connection  with  the  purchase  of  the  Canda  Manufacturing 
Company,  5i, 100,000  of  the  cash  and  securities  of  the  United 
States  Shipbuilding  Company  were  parted  with.  The  Canda 
company  gave  up  nothing  except  its  lands  and  buildings,  its 
good  will,  if  any,  and  practically  all  of  its  machinery  being  re- 
tained by  the  vendors.  The  above  estimated  value  of  5300,000 
is  undoubtedly  greatly  in  excess  of  its  true  value.  No  use  has 


198  TRUSTS,   POOLS  AND   CORPORATIONS 

ever  been  made  of  this  plant,  and  none  was  apparently  contem- 
plated when  it  was  purchased.  After  its  purchase  the  directors 
of  the  United  States  Shipbuilding  Company  caused  an  inquiry  to 
be  made  with  a  view  to  ascertaining  whether  it  could  be  put  to  any 
use,  and  an  adverse  report  was  made.  (See  minutes  of  the  direct- 
ors.) Why  this  property  was  purchased  at  all  is  not  apparent. 

Viewing  the  acquisition  of  the  properties  from  the  standpoint 
of  the  surplus  and  plant  values,  as  disclosed  by  the  books  of  the 
companies,  the  directors  appear  to  have  made  a  gift  of  upwards 
of  $55,000,000  worth  of  stock  and  bonds  of  the  United  States 
Shipbuilding  Company  entrusted  to  their  care. 

It  may  be  claimed,  however,  that  the  book  values  give  no  adequate 
idea  of  the  real  value  of  the  plants  as  going  concerns,  and  that 
the   earnings   of   the   plants   should    be   taken    into   account    in 
ascertaining   such   value.     With    reference    to    this    matter,   the 
minutes  of  the  directors  recite  that   the  constituent  companies, 
exclusive   of   the    Bethlehem    Steel    Company,    had    an    earning 
capacity  annually  of    .         .         .         .         .         .         .         .          .     $2,225,000.00 

and  that  the  Bethlehem  Steel  Company  was  earning    .         .         .       1,800,000.00 

Making  a  total  earning  capacity  of $4,025,000.00 

This  statement  was  false,  and  must  have  been  known  to  be 
so  at  the  time  the  plants  above  mentioned  were  taken  over.  It 
can  serve  no  useful  purpose,  therefore,  in  establishing  value 
from  the  standpoint  of  earning  capacity.  In  this  connection 
the  earnings  of  the  past  year  are  presented  for  consideration  : 

The  earnings  of  all  the  companies  for  the  year  ending  July 
3  ist,  1903,  were  as  follows  : 

Constituent  companies $833,458.74 

Bethlehem  Steel  Company  (net  earnings)  after  deducting  interest   on 

underlying  mortgages,  discounts,  and  depreciation       .         .         .        1,662,  ^30.80 

Total $2,495,989.54 

A  word  of  explanation  with  reference  to  the  earnings  of  the 
subsidiary  shipbuilding  companies.  These  earnings,  as  to  con- 
tinuing contracts,  are  arrived  at  as  follows  :  An  estimate  is  made 
of  the  proportion  of  the  contract  completed.  If  this  proportion 
should  represent  50  per  cent  of  the  entire  contract,  and  the  actual 
cost  of  such  percentage  should  be  found  to  be  10  per  cent  less 
than  the  proportion  of  the  entire  contract  price  then  earned,  the 
profit,  when  such  estimate  is  made,  is  put  down  at  a  figure  which 


UNITED    STATES   SHIPBUILDING   COMPANY          199 

will  represent  10  per  cent  of  such  earned  proportion  of  the  con- 
tract price.  Frequently  this  method  of  arriving  at  profits  is 
found  to  be  erroneous.  The  percentage  of  completion  is  found 
to  have  been  placed  too  high,  and  as  a  consequence,  the  profits 
on  the  entire  contract  are  reduced  much  below  the  estimate, 
and,  in  many  cases,  entirely  wiped  out  and  a  loss  sustained. 

With  reference  to  the  Bethlehem  Steel  Company,  a  different 
method  prevails.  The  method  of  the  latter  company  is  to  take 
profits  only  upon  deliveries,  and  not  to  estimate  earnings  as  the 
work  progresses.  By  this  method  the  actual  profits  may  be 
arrived  at. 

Assuming,  however,  that  the  earnings  of  the  constituent  com- 
panies are  correctly  set  forth  above  (and  in  the  case  of  Bethle- 
hem they  are  not  understated),  of  what  use  are  such  earnings 
for  the  purpose  of  establishing  values  unless  they  are  available 
by  the  United  States  Shipbuilding  Company  ? 

These  companies  claim  to  have  earned  $2,495,989.54,  but  the 
United  States  Shipbuilding  Company  has  been  benefited  to  the 
extent  only  of  a  trifle  over  twelve  per  cent  of  this  amount.  Of  these 
alleged  earnings  the  constituent  companies  have  paid  during  the 
eleven  months  ending  July  I,  1903,  to  the  United  States  Ship- 
building Company  .........  $60,754.23 

The  Bethlehem  Steel  Company,  for  the  purpose  of  meeting  the 

semi-annual  interest  on  the  $10,000,000  mortgage  .  .  .  250,000.00 

Making  a  total  of $310,754.23 


Of  the  5833,458.74  alleged  to  have  been  earned  by  the  Shipbuilding 

companies,  there  has  been  expended  for  new  machinery  .  .  $165,066.38 

Of  the  earnings  of  Bethlehem  company  there  was  expended  for 

plant  betterment  .....  ....  683,370.24 

There  was  paid  by  all  of  the  companies  to  the  United  States  Ship- 
building Company,  as  above  stated  ......  310,754.23 

Making  a  total  of $1,159,190.85 

The  balance  of  the  earnings  (considering  the  above  amount 
as  having  been  earned)  amounting  to  the  sum  of  51,336,798.69, 
was  retained  by  the  companies.  By  reason  of  the  unsafe  method 
of  ascertaining  the  profits  of  the  shipbuilding  companies,  it  is  ex- 
tremely doubtful  whether  they  have  earned  any  such  amount  as 
above  set  forth.  It  is  true,  however,  assuming  that  their  earnings 
have  been  as  above  mentioned,  that  their  financial  condition  has 
not  been  such  as  to  warrant  them  in  withdrawing  any  consider- 


200  TRUSTS,   POOLS   AND   CORPORATIONS 

able  sum  from  their  assets  for  payment  to  the  United  States 
Shipbuilding  Company.  The  utmost  that  they  could  do  during 
the  past  year  was  a  trifle  over  seven  per  cent  of  the  amount  claimed 
by  them  to  have  been  earned.  The  Bethlehem  company,  during 
the  past  year,  insisted  that  no  sum  in  excess  of  the  $250,000 
paid  by  them  to  meet  the  interest  on  the  $10,000,000  instrument, 
known  as  the  Schwab  mortgage,  could  be  withdrawn  from  their 
assets  for  payment  to  the  United  States  Shipbuilding  Company ; 
or,  in  other  words,  that  about  fifteen  per  cent  of  their  entire  earn- 
ings was  the  best  they  could  do  for  the  United  States  Shipbuilding 
Company.  Concerning  the  earnings  of  the  Bethlehem,  your 
Receiver  will  deal  at  length  elsewhere  in  this  report,  but  it  may 
be  said  here  that  Bethlehem  deliberately  used  up  its  earnings  in 
making  enormous  purchases  of  material  for  its  own  benefit,  and 
in  extensions,  improvements,  and  repairs,  in  order  apparently  to 
keep  its  earnings  from  the  United  States  Shipbuilding  Company. 
On  the  basis  of  what  the  United  States  Shipbuilding  Company 
received  from  all  the  companies  last  year,  there  would  be  suffi- 
cient income  only  to  meet  the  interest,  at  five  per  cent,  on  an 
investment  of  a  trifle  over  $6,000,000.  It  may  be  insisted  that 
this  is  not  the  best  the  companies  can  do,  and  therefore  this 
amount  should  not  be  taken  as  a  guide  in  establishing  the  value 
of  the  plants.  Your  Receiver  is  satisfied  that  it  is  not  the  best  the 
companies  can  do,  especially  in  the  case  of  Bethlehem.  It  is 
certain  that  better  returns  would  have  been  received  from  the 
constituent  companies  if  they  had  been  brought  within  closer 
reach  of  the  central  company,  and  if  officers  had  been  placed 
in  charge  who  had  looked  to  the  interests  of  the  central  organi- 
zation and  not  wholly  to  the  betterment  of  the  constituent  com- 
panies. It  is  undoubtedly  true  that  the  fastening  upon  the 
constituent  companies  of  certain  officials,  at  fixed  salaries,  and 
for  a  long  term  of  years,  practically  beyond  the  reach  of  the 
central  organization,  has  materially  prevented  the  United  States 
Shipbuilding  Company  from  obtaining  the  best  results  from  its 
properties.  In  the  case  of  the  Bethlehem,  a  Board  of  Directors 
having  the  welfare  of  the  United  States  Shipbuilding  Company 
at  heart,  rather  than  its  destruction,  would  have  conduced  much 
to  the  gain  of  the  latter  company.  With  these  defects  in  man- 


UNITED   STATES  SHIPBUILDING  COMPANY         20 1 

agement  removed,  the  earning  capacity  of  all  the  companies,  so 
far  as  the  United  States  Shipbuilding  Company  is  concerned, 
would  be  greatly  enhanced. 

At  the  end  of  eleven  months  of  operation,  the  United  States 
Shipbuilding  Company  was  adjudged  insolvent  and  a  receiver 
appointed.  This  was  due  either  to  the  fact  that  the  earnings 
were  insufficient  to  meet  its  obligations,  or  because  those  earnings 
were  improperly  diverted.  Your  Receiver  will  hereinafter  dis- 
cuss this  matter,  but  under  this  head  he  respectfully  submits 
that  the  earnings  of  the  several  companies  during  the  past  year 
may  not  safely  be  used  for  the  purpose  of  establishing  the  value 
of  the  plants. 

EXCESSIVE  PRICE  PAID  FOR  PLANTS 

Considering  the  value  of  the  plants,  therefore,  either  from  the 
standpoint  of  the  books,  or  the  earning  capacity  of  the  compa- 
nies, and  allowing  for  an  increase  in  earnings  in  the  future,  it  is 
evident  that  the  accommodating  directors  of  the  United  States 
Shipbuilding  Company,  in  acquiring  these  properties,  deliberately 
gave  away  many  million  dollars  in  the  stock  and  bonds  of  their 
Company. 

Who  participated  in  this  wholesale  plunder  ?  The  testimony 
now  being  taken  in  the  above  entitled  proceedings  will  doubtless 
disclose  the  name  of  all  the  participants  ;  but  as  such  testimony 
will  be  submitted  to  this  Court  for  action,  your  Receiver  does 
not  deem  it  proper  to  comment  upon  it  here.  Certain  it  is  that 
much  of  this  vast  amount  of  stock  and  bonds  was  taken  by  per- 
sons and  corporations  who  parted  with  little  or  no  consideration 
in  exchange  therefor.  Blocks  of  the  stock  went  to  the  vendors  of 
the  constituent  plants  and  to  the  purchasers  of  bonds,  as  bonus, 
absolutely  without  benefit  to  the  Company  ;  §20,000,000  of  it 
admittedly  went  to  Mr.  Charles  M.  Schwab  in  addition  to  the 
agreed  price  for  Bethlehem.  Some  of  it  went  to  the  promoters 
of  this  artistic  swindle  ;  and  when  all  had  been  provided  for, 
what  was  left  of  the  bonds,  amounting  to  $1,500,000,  was 
handed  back  to  the  Company  ostensibly  to  supply  it  with 
"  working  capital." 


202  TRUSTS,   POOLS  AND   CORPORATIONS 

From  the  foregoing  statement  as  to  values,  it  is  apparent  that 
the  $24,500,000  of  bonds  given  up  by  the  directors  was  an 
excessive  price  for  all  the  plants  purchased.  Your  Receiver 
is  advised  that  as  to  the  $44,997,000  of  the  preferred  and  com- 
mon stock  handed  over  by  the  directors  to  the  vendors  and 
promoters  of  this  scheme,  it  cannot  successfully  be  maintained 
that  any  value  was  paid  therefor.  Treating  the  issue  of  bonds, 
therefore,  as  full  payment  for  the  properties  (and  in  so  doing  the 
Shipbuilding  company  alone  is  being  injured),  it  follows  that  the 
vendors  and  promoters  and  their  associates  in  the  transfer  and 
conveyance  of  the  various  plants  to  the  United  States  Ship- 
building Company,  by  the  acceptance  of  this  $44,997,000  of  the 
capital  stock  of  the  Shipbuilding  company,  without  paying  value 
therefor,  became  liable  thereon  to  said  corporation,  by  virtue  of 
the  provisions  of  section  21  of  an  act  of  the  Legislature  of  the 
State  of  New  Jersey,  entitled  an  act  concerning  corporations 
(Revision  of  1896).  The  United  States  Shipbuilding  Company 
was  entitled  to  recover  such  indebtedness  from  the  holders  of 
such  stock  and  your  Receiver  is  advised  that  he  is  entitled  to 
enforce  the  same.  Accordingly,  your  Receiver  has  offset  against 
the  sum  alleged  to  be  due  on  the  $10,000,000  mortgage  to  the 
New  York  Security  and  Trust  Company  as  trustee,  to  protect 
the  issue  of  bonds  to  Charles  M.  Schwab,  the  liability  of  the 
said  Charles  M.  Schwab  on  the  $20,000,000  of  stock  received 
by  him  as  aforesaid,  and  has  interposed  an  answer  in  the  suit 
by  said  trustee  to  foreclose  the  mortgage  given  as  security  for 
said  bonds,  claiming  that  by  virtue  of  said  offset  the  total  issue 
of  said  bonds  has  been  fully  paid  and  satisfied.  As  to  the  issue 
of  the  bonds  under  the  mortgage  for  $16,000,000  made  to  the 
Mercantile  Trust  Company,  your  Receiver  charges  that  many  of 
said  bonds  were  received  by  the  vendors  and  promoters  and 
their  transferees,  and  were  issued  by  said  Mercantile  Trust  Com- 
pany, with  full  knowledge  of  the  right  of  the  United  States 
Shipbuilding  Company  to  be  paid  for  the  common  and  preferred 
stock  taken  by  said  vendors  and  other  holders  of  said  bonds 
without  value,  and  as  to  all  bonds  secured  by  said  mortgage  so 
received,  your  Receiver  has  offset  against  the  amount  alleged  to 
be  due  thereon,  the  liability  of  the  holders  thereof  on  the  com- 


UNITED   STATES   SHIPBUILDING   COMPANY          203 

mon  and  preferred  stock  so  received  by  them,  or  their  trans- 
ferrers,  and  has  interposed  an  answer  in  the  suit  instituted  by 
the  Mercantile  Trust  Company  to  foreclose  said  mortgage,  claim- 
ing that  by  virtue  of  such  offset  the  total  issue  of  said  bonds,  or 
the  principal  part  thereof,  has  been  fully  paid  and  satisfied. 

CULPABILITY  OF  THE  UNITED  STATES  SHIPBUILDING 
COMPANY'S  DIRECTORS  AND  OTHERS 

Your  Receiver  has  spoken  of  the  directors  of  the  United  States 
Shipbuilding  Company  as  if  they  were  wholly  responsible  for 
parting  with  many  million  dollars  in  the  stocks  and  bonds  of 
the  United  States  Shipbuilding  Company  without  value.  The 
directors  who  were  guilty  of  this  act  are  responsible  and  should 
be  held  accountable  for  their  unlawful  act ;  but  they  are  not 
alone  responsible.  In  the  first  place,  they  were  not  bona-fide 
holders  of  the  stock  of  the  United  States  Shipbuilding  Company. 
They  were  clerks  selected  by  the  promoters  of  this  scheme  from 
the  Corporation  Trust  Company.  They  took  an  assignment  of 
a  subscriptive  right  to  a  share  of  stock,  and  upon  the  strength 
of  this  alleged  subscription  they  dealt  with  the  property  of  the 
United  States  Shipbuilding  Company  in  the  manner  above  re- 
cited. These  young  men  were  mere  figureheads,  placed  in  this 
position  in  order  that  the  scheme  of  others  might  be  carried  into 
effect.  This  scheme  was  placed  before  them  by  its  instigators, 
through  the  medium  of  an  alleged  offer  of  John  \V.  Young,  and 
the  so-called  directors  in  conformity  with  their  instructions,  and, 
without  the  ability  or  the  knowledge  to  pass  upon  the  matters 
therein  contained,  proceeded  to  do  as  they  were  told.  Your 
Receiver  charges  that  the  properties  of  the  various  constituent 
companies  were  sold  to  the  United  States  Shipbuilding  Company 
for  an  amount  which  the  vendors  of  such  properties,  at  the  time 
of  such  sale,  knew  to  be  far  in  excess  of  the  fair  value  of  said 
plants  ;  and  that  the  plan  to  combine  such  properties  was  con- 
ceived by  certain  promoters  and  was  consummated  by  them  with 
full  knowledge  of  its  injustice  to  the  United  States  Shipbuilding 
Company. 

Your  Receiver  begs  to  direct  the  attention  of  the  Court  to  the 


204  TRUSTS,    POOLS   AND    CORPORATIONS 

fact  that  in  the  purchase  of  the  various  constituent  companies, 
the  United  States  Shipbuilding  Company  was  absolutely  without 
independent  and  intelligent  representation.  No  inspection  of 
the  properties  was  made  on  behalf  of  the  Shipbuilding  company. 
No  independent  appraisement  was  had.  No  steps  seem  to  have 
been  taken  by  any  one  with  a  view  to  protecting  the  interests  of 
the  United  States  Shipbuilding  Company.  The  directors  who 
purported  to  act  for  the  Company  were  the  tools  of  the  pro- 
moters;  the  debts  of  the  constituent  companies,  aggregating 
$2,334,987.64,  seem  to  have  been  purposely  withheld,  and  the 
bonds  and  stock  of  the  United  States  Shipbuilding  Company 
were  placed  wholly  at  the  mercy  of  the  vendors  and  promoters. 

OPERATION  OF  THE  UNITED  STATES  SHIPBUILDING  COMPANY 

Under  such  auspices  the  United  States  Shipbuilding  Company 
began  operations.  On  paper  the  constituent  companies  had  a 
working  capital  in  excess  of  $3,000,000,  yet  offices  had  hardly 
been  secured  by  the  United  States  Shipbuilding  Company  before 
the  latter  company  was  compelled  to  assist  the  constituent  com- 
panies to  pay  their  debts.  The  alleged  working  capital  of  the 
constituent  companies  existed  on  paper  only.  It  was  made  to  ap- 
pear as  available  capital  in  order  that  the  sale  might  be  consum- 
mated. After  such  sale  there  was  no  longer  any  necessity  for 
the  continuance  of  this  pretence,  and  accordingly  demands  for 
remittances  began  to  pour  into  the  central  organization.  During 
the  eleven  months  ending  July  i,  1903,  the  United  States  Ship- 
building Company  was  compelled  to  advance  to  the  constituent 
companies  the  sum  of  $1,019,955.78.  Of  this  amount  $60,754.23 
was  returned  to  the  Company,  making  the  net  amount  advanced 
to  the  constituent  companies  $959,201.55.  In  addition  to  this 
sum  it  was  compelled  to  part  with  $520,000  of  the  bonds  which 
had  been  placed  with  it  as  working  capital,  for  the  purpose  of 
securing  indorsements  on  promissory  notes  which  the  United 
States  Shipbuilding  Company  was  required  to  make  for  the 
accommodation  of  the  constituent  companies. 

The  reason  for  this  has  been  herein  elsewhere  suggested. 
When  the  various  properties  were  purchased,  the  debts  of  such 


UNITED   STATES   SHIPBUILDING   COMPANY          205 

companies  were  not  disclosed.  Had  there  'been  independent, 
intelligent  representation  on  the  part  of  the  United  States  Ship- 
building Company  in  connection  with  the  acquisition  of  these 
properties,  it  would  have  been  discovered  that  the  new  com- 
pany was  taking  over  $2,334,987.64  of  debts,  a  considerable  part 
of  which  called  for  immediate  attention.  Had  there  been  such 
representation,  it  would  have  been  disclosed  that  the  companies 
had  practically  no  working  capital  except  such  as  they  might 
receive  from  their  vendee,  and  with  this  knowledge  the  whole- 
sale delivery  of  bonds  and  stocks  of  the  United  States  Ship- 
building Company  would  undoubtedly  have  been  averted.  But 
there  was  no  one  in  that  transaction  to  protect  the  interest  of 
the  new  company,  and  as  a  consequence  it  was  not  only  made 
to  pay  excessive  prices  for  the  property  purchased,  but  obliga- 
tions were  assumed  by  reason  of  this  vast  amount  of  debt  that 
practically  exhausted  the  resources  of  its  treasury. 

While  the  bills  of  sale  from  the  various  constituent  companies 
purported  to  transfer  all  the  personal  property  of  such  com- 
panies to  the  United  States  Shipbuilding  Company,  including 
their  cash,  amounting  to  the  sum  of  $389,317.57  (exclusive  of 
Bethlehem),  this  amount  was  retained  by  the  various  companies 
when  the  leases  above  mentioned  were  made,  and  no  benefit 
therefrom  was  ever  received  by  the  United  States  Shipbuilding 
Company,  except  the  doubtful  one  of  allowing  this  amount  to 
help  swell  the  alleged  working  capital  of  the  constituent  com- 
panies. 

The  United  States  Shipbuilding  Company  was  not  fairly 
organized  until  some  time  in  September,  1902.  On  the  24th 
day  of  December,  1902,  with  a  view  to  inducing  the  New  York 
Stock  Exchange  to  list  the  entire  stock  and  bond  issue  of  the 
Company,  amounting  to  $69,500,000,  a  statement  was  made  to 
such  exchange,  over  the  signature  of  A.  C.  Gary,  treasurer  of 
the  United  States  Shipbuilding  Company.  This  statement  re- 
cites that  the  earnings  of  the  subsidiary  companies,  exclusive  of 
the  Bethlehem  Steel  Company,  for  the  year  ending  June  30, 
1902,  amounted  to  the  sum  of  81,942,522.03,  and  that  the  net 
earnings  of  the  Bethlehem  Steel  Company  for  twelve  months 
ending  July  31,  1902,  amounted  to  the  sum  of  $1,441,208.03. 


206  TRUSTS,   POOLS  AND   CORPORATIONS 

Without  taking  time  to  controvert  this  statement,  which  was 
clearly  erroneous,  and  which,  upon  a  proper  examination,  would 
have  been  shown  to  be  so,  an  allegation  appears  in  this  statement 
of  far  more  serious  import.  It  is  therein  alleged  that  the  net 
earnings  of  the  United  States  Shipbuilding  Company  and  the 
Bethlehem  Steel  Company  for  the  three  months  ending  Novem- 
ber 30,  1902,  amounted  to  the  sum  of  $1,163,022.22.  Of  this 
amount  the  United  States  Shipbuilding  Company  was  said  to 
have  earned  up  to  that  time  $5  54,02 1 .45,  and  the  portion  earned  by 
the  Bethlehem  Steel  Company  was  placed  at  $609,000.77.  These 
earnings  were  said  to  be  net ;  but  in  the  case  of  the  Bethlehem 
Steel  Company  no  allowance  was  made  therein  for  depreciation, 
and,  furthermore,  such  earnings  constituted  no  basis  for  averag- 
ing the  annual  profit,  as  the  later  report  of  the  Bethlehem  Steel 
Company  shows.  In  the  case  of  the  United  States  Shipbuilding 
Company,  the  earnings  existed  on  paper  only,  as  appears  from 
subsequent  reports.  Your  Receiver  believes  that  the  officials  of 
the  United  States  Shipbuilding  Company  did  not  know  that 
erroneous  reports  were  being  made  to  them  by  the  constituent 
companies,  but  their  action  was  at  least  injudicious  in  so  wording 
the  statement  to  the  Stock  Exchange  as  to  impel  the  inference  that 
the  earnings  of  the  United  States  Shipbuilding  Company  up  to  the 
3Oth  day  of  November,  1902,  were  available  for  the  purpose  of 
meeting  the  accrued  interest  and  sinking  fund  payment  on  all 
bonds  of  the  company  for  that  quarter,  for  during  the  very  time 
within  which  the  alleged  earnings  of  $554,021.45  had  been  made 
by  the  subsidiary  companies,  and  which  the  statement  infers 
were  available  for  the  payment  of  all  accrued  interest  and  sink- 
ing fund  charges,  they  had  been  compelled  to  advance  in  cash 
to  the  constituent  companies  the  sum  of  8424,467.59. 

On  this  showing  the  application  to  list  the  securities  was  granted 
by  the  New  York  Stock  Exchange  on  January  I4th,  1903.  A 
little  over  four  months  later,  on  the  25th  clay  of  May,  1903,  a 
statement  was  issued  to  the  public  embodying  a  plan  for  the 
reorganization  of  the  United  States  Shipbuilding  Company  upon 
a  basis  that  would  enable  it  to  exist.  This  proposed  plan  of 
reorganization  stated  that  "by  reason  of  the  excessive  mortgage 
obligations  of  the  United  States  Shipbuilding  Company,  its 


UNITED   STATES   SHIPBUILDING   COMPANY          207 

borrowing  capacity  and  credit  has  become  so  seriously  affected 
that  outstanding  notes  are  being  pressed  for  payment  and  the 
making  of  further  loans  is  rendered  impossible,"  and  recom- 
mended that  the  Company  should  be  reorganized  upon  a  basis 
of  almost  40  per  cent  less  than  was  originally  considered  the 
fair  value  of  the  plants.  If  other  evidence  than  the  figures  above 
set  forth  be  needed  to  prove  that  vendors  and  promoters  of  this 
scheme  sought  to  secure  stocks  and  bonds  of  the  United  States 
Shipbuilding  Company  without  consideration,  it  is  supplied  by 
this  proposed  Plan  of  Reorganization,  which  practically  states 
that  the  Company  is  unable  to  pay  interest  on  a  greater  capital- 
ization and  bond  issue  than  $43,000,000,  an  amount  $1,487,000 
less  than  the  capital  of  the  United  States  Shipbuilding  Company 
distributed  in  connection  with  the  purchase  of  the  properties,  to 
say  nothing  of  the  bond  issues  of  $24,500,000. 

CAUSES  OF  FAILURE 

What  were  the  causes  of  failure  of  the  United  States  Ship- 
building Company  ?  One  of  such  causes  was  the  fact  that  the 
directors  parted  with  bonds  to  an  amount  upon  which  it  was 
impossible  to  meet  the  interest.  The  failure,  however,  was  pre- 
cipitated, if  not  directly  brought  about,  by  the  fact  that  in  the 
Bethlehem  transaction  the  United  States  Shipbuilding  Company 
officers  had  to  deal  with  people  who,  while  thoroughly  under- 
standing the  intricacies  of  "higher  finance,"  seemed  to  have 
overlooked  the  requirements  of  common  fairness.  In  speaking 
of  plant  values  elsewhere  in  this  report,  the  Bethlehem  property 
has  been  dealt  with  as  though  it  had  been  purchased  by  the 
United  States  Shipbuilding  Company,  but  an  examination  of  the 
transaction  will  show  that  it  was  otherwise.  While  the  agreed 
price  for  the  Bethlehem  company  was  89,000,000,  to  be  paid  for 
by  an  issue  of  S  10,000,000  of  bonds  at  90,  the  directors  of  the 
United  States  Shipbuilding  company,  upon. request,  handed  over 
to  Mr.  Charles  M.  Schwab  an  additional  amount  of  820,000,000 
in  the  common  and  preferred  stock  of  the  United  States  Ship- 
building Company.  As  this  S20, 000,000  of  stock  would  not  be 
sufficient  to  give  Mr.  Schwab  the  control  of  the  United  States 


208  TRUSTS,    POOLS   AND    CORPORATIONS 

Shipbuilding  Company,  there  was  inserted  in  the  mortgage  given 
to  secure  his  $10,000,000  of  bonds,  a  provision  that  such  bonds 
should  have  a  voting  power  equal  to  $10,000,000  of  stock.  As 
the  total  issue  of  stock  of  the  United  States  Shipbuilding  Com- 
pany was  but  $45,000,000,  the  $30,000,000  voting  power  thus 
given  to  Mr.  Schwab  was  sufficient  to  justify  him  in  saying  that 
he  did  not  sell  the  Bethlehem  Steel  Company,  but  took  over  the 
United  States  Shipbuilding  Company,  the  directors  of  that  Com- 
pany giving  him  $30,000,000  in  stock  and  bonds  for  taking  it 
off  their  hands. 

In  this  deal  Mr.  Schwab  parted  with  nothing.  In  the  sale  of 
the  other  constituent  companies,  the  real  and  personal  property, 
as  well  as  their  capital  stock,  were  transferred  to  the  United  States 
Shipbuilding  Company  by  the  necessary  deeds,  bills  of  sale,  and 
assignments.  But  in  the  case  of  Bethlehem,  Mr.  Schwab  per- 
mitted to  be  given  up  only  its  capital  stock,  and  this  he  did  in  such 
manner  as  to  place  it  beyond  the  control  of  the  Shipbuilding 
company.  If  interests  friendly  to  the  United  States  Shipbuild- 
ing Company  had  controlled  this  stock,  it  would  have  been  able 
to  reach  the  earnings  of  the  Bethlehem  Steel  Company  through  a 
friendly  Board  of  Directors;  but  in  the  Sio, 000,000  mortgage  it 
was  provided  that  the  Trustee  should  designate  three  of  such 
directors,  and  the  United  States  Shipbuilding  Company  should 
designate  four.  As  Mr.  Schwab  controlled  the  United  States 
Shipbuilding  Company,  by  reason  of  his  aforesaid  majority  of 
stock,  and  as  the  Trustee  was  of  his  own  selection,  the  United 
States  Shipbuilding  Company  was  absolutely  at  the  mercy  of  Mr. 
Schwab.  His  advisers,  however,  in  evident  fear  that  something 
had  been  overlooked,  caused  the  United  States  Shipbuilding 
Company  to  execute  a  contract  wherein  it  agreed  and  guaranteed 
that  so  long  as  any  part  of  the  Si 0,000,000  issue  of  bonds  above 
referred  to  should  be  outstanding  and  unpaid,  the  Bethlehem 
company  should  pay  dividends  on  its  entire  outstanding  capital 
stock  at  the  rate  of  not  less  than  six  per  cent  per  annum,  and  for 
the  purpose  of  making  such  payments  the  Shipbuilding  company 
agreed  that  the  Bethlehem  company  should  earn,  over  and  above 
its  operating  expenses  and  fixed  charges  (including  interest  on 
its  bonds  and  taxes),  and  over  and  above  the  working  capital  of 


UNITED   STATES   SHIPBUILDING   COMPANY         209 

$4,000,000  therein  provided  for,  a  sum  sufficient  to  make  such 
annual  dividend  disbursements ;  and,  in  the  event  of  the  failure 
of  the  Bethlehem  company  earning  sufficient  to  pay  such  divi- 
dend at  the  rate  of  six  per  cent,  then  the  United  States  Ship- 
building Company  was  to  pay  to  the  Bethlehem  company,  on 
demand,  a  sum  sufficient  to  make  such  annual  dividend  dis- 
bursements. The  Shipbuilding  company  further  agreed  to  sup- 
ply the  Bethlehem  company  with  all  such  orders,  contracts, 
work  and  earning  capacity  as  should  be  necessary  to  enable  it 
to  earn  and  pay  the  annual  dividends  above  mentioned.  Was 
ever  such  another  agreement,  so  apparently  harmless,  yet  so 
ruinous,  conceived  by  the  mind  of  man  ?  On  its  face  it  was 
simply  an  agreement  to  the  effect  that  if  sufficient  earnings  were 
not  made  by  the  Bethlehem  to  pay  a  dividend  of  6  per  cent  on 
its  capital  stock,  the  United  States  Shipbuilding  Company  would 
advance  such  sum.  This  agreement  was  an  absurd  arrange- 
ment, in  view  of  the  fact  that  the  United  States  Shipbuilding  Com- 
pany was  the  nominal  owner  of  this  stock,  and  as  such  was  entitled 
to  its  dividends;  nevertheless  the  United  States  Shipbuilding 
Company  was  made  to  agree  in  effect  that  if  it  wanted  dividends 
from  Bethlehem  it  should  contribute  the  means  to  enable  the  pay- 
ment of  such  dividends.  An  excuse  for  the  United  States  Ship- 
building Company  officials  entering  into  such  an  agreement  might 
be  found  in  the  supposition  that  they  may  have  believed  that  as 
they  had  the  right  to  designate  four  of  the  seven  directors  of  the 
Bethlehem  Steel  Company,  they  would  be  able  to  control  the 
earnings  of  that  company,  and  the  agreement  above  mentioned 
might  become  inoperative.  Such  a  belief,  however,  had  no  sub- 
stantial foundation,  for,  as  heretofore  stated,  the  control  both  of  the 
Bethlehem  and  the  United  States  Shipbuilding  Company  was 
vested  in  Air.  Schwab.  Your  Receiver  will  not  attempt  to  advance 
any  reason  why  the  latter  thought  it  necessary  to  take  any  such 
agreement  in  view  of  the  fact  that  he  had  previously  thereto  ob- 
tained a  control  of  the  Shipbuilding  company  that  would  enable 
him  at  any  moment  to  throttle  it.  As  if  the  foregoing  provisions 
in  said  agreement  were  not  sufficient,  the  United  States  Shipbuild- 
ing Company  was  further  made  to  agree  that  in  the  event  that  the 
working  capital  of  the  Bethlehem  Steel  Company  should  at  any 


210  TRUSTS,    POOLS   AND    CORPORATIONS 

time  fall  below  $4,000,000,  the  United  States  Shipbuilding  Com- 
pany would,  upon  demand,  make  up  such  sum  as  might  be  neces- 
sary to  bring  the  working  capital  up  to  that  figure.  The  agree- 
ment contains  other  provisions,  all  operating  against  the  United 
States  Shipbuilding  Company,  but  enough  has  been  referred  to  to 
show  that  in  signing  it  the  United  States  Shipbuilding  Company 
had  lost  all  chance  of  ever  reaching  the  earnings  of  the  Bethle- 
hem Steel  Company.  For,  assuming  that  Mr.  Schwab's  directors 
of  the  United  States  Shipbuilding  Company  should  demand  of 
Mr.  Schwab's  directors  of  the  Bethlehem  Steel  Company  that  a 
dividend  be  declared  from  the  earnings  of  the  latter  company, 
Mr.  Schwab's  directors  of  the  Bethlehem  Steel  Company  could 
always  reply  (as  they  did  when  demand  was  made)  that  it  was  not 
considered  wise  to  declare  a  dividend  at  that  time. 

In  April,  1903,  it  became  apparent  that  unless  funds  were 
advanced  by  the  Bethlehem  Steel  Company  for  the  purpose  of 
meeting  the  semi-annual  interest  on  the  first  mortgage  bonds 
due  July  ist,  a  default  in  the  payment  thereof  would  ensue. 
Notwithstanding  the  urgent  need  apparent  at  that  time  for 
retrenchment,  and  the  necessity  for  requiring  Bethlehem  to  set 
aside  some  of  its  large  earnings  for  the  purpose  of  meeting  the 
coming  interest,  the  Executive  Committee  of  the  United  States 
Shipbuilding  Company,  on  the  7th  day  of  April,  1903,  adopted  a 
resolution  approving  a  report  of  the  president  of  the  Bethlehem 
Steel  Company  with  reference  to  certain  improvements  and 
extensions  alleged  to  have  been  required  at  the  works  of  the 
latter  company,  showing  a  total  required  expenditure  of  $2,802,000 
(including  8365,000  previously  appropriated).  On  the  I4th  day 
of  April,  1903,  the  directors  of  the  United  States  Shipbuilding 
Company  held  a  meeting,  at  which  time  it  was  sought  to  approve 
the  minutes  of  the  previous  meeting  of  the  Executive  Committee. 
On  a  motion  to  approve  such  minutes,  Mr.  Lewis  Nixon,  the 
president  of  the  company,  stated  that  he  desired  to  go  on  record 
concerning  the  resolution  passed,  to  the  effect  that  in  providing 
for  any  such  extensions  and  improvements  it  should  be  made 
a  condition  of  any  such  expenditure  that  proper  provision 
should  be  made  to  safeguard  the  amount  of  8900,000,  which 
must  be  declared  as  a  dividend  by  the  Bethlehem  company,  and 


UNITED   STATICS   SHIPBUILDING    COMPANY          211 

suggested  that  provision  to  that  effect  be  added  to  the  authority 
asked  for.  Notwithstanding  this  request  of  Mr.  Nixon,  the 
minutes  of  the  Executive  Committee  were  approved  by  the 
directors. 

Your  Receiver  is  informed,  and  believes  it  to  be  true,  that 
thereafter  Mr.  Lewis  Nixon  repeatedly  sought  to  induce  the  direc- 
tors of  the  United  States  Shipbuilding  Company  to  cooperate 
with  him  in  compelling  the  Bethlehem  company  to  pay  over 
some  of  its  earnings  for  the  purpose  of  staving  off  the  impending 
default  of  the  United  States  Shipbuilding  Company;  but  from 
the  I4th  day  of  April,  1903,  until  the  22cl  day  of  June,  1903,  it 
was  impossible  to  obtain  a  quorum  either  of  the  Executive 
Committee  or  of  the  directors  of  the  United  States  Shipbuilding 
Company.  Again,  on  the  2/th  of  June,  while  the  proceedings 
were  pending  in  this  court  for  the  appointment  of  a  Receiver, 
Mr.  Nixon  demanded  the  Bethlehem  Steel  Company's  assistance 
for  the  purpose  of  averting  the  impending  default,  through  the 
medium  of  the  following  letter : 

NEW  YORK,  June  2jth,  1903. 
E.  M.  Mdi.vAix,  ESQ., 

President  Bethlehem  Steel  Company, 
South  Bethlehem,  Pa.  : 

DKAR  SIR  —  The  Bethlehem  Steel  Company,  having  earned  during 
the  year  ending  August  ist,  1903,  over  and  above  its  operating  expenses 
and  fixed  charges  (including  interest  on  its  bonds  and  taxes),  and  with- 
out impairment  of  its  working  capital  of  $4.000,000,  a  sum  sufficient  to 
pay  a  dividend  of  6  per  cent  on  its  entire  present  outstanding  capital 
stock,  I  request  and  demand,  in  behalf  of  the  United  States  Shipbuild- 
ing Company,  as  owner  of  all  of  said  capital  stock,  that  your  company, 
on  or  before  June  30,  1903-  declare  a  dividend  in  an  amount  sufficient 
to  pay  a  bond  intere.it  of  8362,500,  due  July  ist,  1903,  and  pay  the  same 
as  required  by  the  terms  of  the  agreement  of  Augu-t  i2th,  1902,  between 
your  company  and  the  United  States  Shipbuilding  Company,  and  credit 
this  upon  the  yearly  dividend  on  the  sto;'k  of  the  Bethlehem  Steel  Com- 
pany. 8250,000  of  which  lias  already  been  declared  and  paid  in  a  simi- 
lar manner  to  meet  the  interest  on  the  twenty-year  bonds. 

Yours  truly, 
(Signed;  I,K\VIS  Nixo.v, 

President, 


212  TRUSTS,    POOLS  AND   CORPORATIONS 

No  attention  was  paid  to  this  demand,  and  the  default  fol- 
lowed. Had  the  efforts  of  Mr.  Nixon  been  successful,  the 
subsequent  adjudication  of  insolvency  and  the  appointment  of 
a  receiver  would  have  been  averted. 

Your  Receiver  considers  it  his  duty  to  bring  to  the  attention 
of  the  Court  the  fact  that  while  the  Bethlehem  company  was 
earning  upwards  of  $2,000,000  annually,  these  earnings  were 
being  placed  beyond  the  reach  of  the  United  States  Shipbuild- 
ing Company  by  the  making  of  vast  extensions  and  improve- 
ments in  the  Bethlehem  company  and  the  purchasing  and 
ordering  of  enormous  quantities  of  merchandise,  with  the 
apparent  purpose  of  bringing  about  the  destruction  of  the 
United  States  Shipbuilding  Company. 

Further  proof  in  this  behalf  is  supplied  by  Mr.  E.  M.  Mcllvain, 
President  of  the  Bethlehem  Steel  Company,  in  his  letter  to  Mr. 
George  R.  Sheldon,  Chairman  of  the  Reorganization  Committee. 
In  this  letter,  dated  the  25th  of  May,  1903,  Mr.  Mcllvain  states 
that  during  the  fiscal  year  of  the  Bethlehem  Steel  Company 
ending  April  3Oth,  1903,  the  net  earnings  of  his  company  were 
82,518,264.58.  In  the  third  paragraph  of  this  letter  he  states 
that  for  the  year  beginning  May  I,  1903,  a  conservative  estimate 
of  the  net  earnings  of  the  Bethlehem  Steel  Company  would  be 
about  52,250,000  after  deducting  8517,550  of  earnings  for  the 
purpose  of  paying  interest  on  the  underlying  mortgages.  Of 
this  amount  of  earnings,  he  states,  in  the  fourth  paragraph  of 
his  letter,  that  he  feels  confident  that  there  could  be  withdrawn 
for  distribution  (for  dividends)  the  sum  of  $i, 200,000.  During 
the  year  within  which  Mr.  Mcllvain  says  the  net  earnings  of  the 
Bethlehem  Steel  Company  were  82,518,264.58,  the  utmost  that 
the  Bethlehem  Steel  Company  could  be  induced  to  give  up  to 
the  United  States  Shipbuilding  Company  was  8250,000.  But 
in  presenting  the  matter  to  the  public,  through  the  medium  of 
the  Reorganization  Committee,  and  with  a  view  to  inducing  the 
acceptance  of  a  plan  that  would  further  the  interests  of  Mr. 
Schwab,  he  states  that  from  the  earnings  which  are  not  in  excess 
of  the  fiscal  year  ending  April  30,  1903,  he  would  be  able  to 
withdraw  and  pay  over  to  the  reorganized  company  a  sum  almost 
five  times  as  much  as  his  company  was  able  to  do  when  there 


UNITED   STATES   SHIPBUILDING    COMPANY         213 

was  the  utmost  need  for  its  greatest  contribution.  Your  Re- 
ceiver is  unwilling  to  believe  that  Mr.  Mcllvain  would  deliber- 
ately make  a  false  statement  in  this  connection.  lie  is  also 
willing  to  accept  his  statement  that  the  Bethlehem  company 
would  be  able  to  withdraw  from  its  current  assets  the  sum  of 
$1,200,000  for  distribution  during  the  year  beginning  May  i, 
1903,  but  in  accepting  this  statement  and  considering  it  in  con- 
nection with  the  fact  that  all  Bethlehem  would  advance  during 
the  past  year  was  $250,000,  and  bearing  in  mind  that  the  major 
part  of  the  improvements  and  extensions  above  authorized  were 
to  be  completed  in  subsequent  years,  it  is  difficult  to  draw  any 
other  conclusion  than  that  the  earnings  of  Bethlehem  company 
during  the  past  year  were  deliberately  withheld  for  the  purpose 
of  wrecking  the  United  States  Shipbuilding  Company.  During 
the  year  ending  July  31,  1903,  Bethlehem  expended  for  addi- 
tions to  its  plant  the  sum  of  $683,370.24.  In  addition  to  this 
amount  it  expended  for  extraordinary  and  general  repairs,  dur- 
ing the  year  ending  April  30,  1903,  according  to  the  report  of 
Price,  Waterhouse  &  Co.,  the  sum  of  $450,000.  It  increased  its 
material  (unfinished  and  finished  product  and  stores)  $687,149. 16. 
Its  notes  payable,  which  amounted  to  $350,000  when  the  stock 
of  this  company  was  attempted  to  be  purchased  by  the  United 
States  Shipbuilding  Company,  were  reduced  $200,000  up  to 
August  i,  1903,  and  have  since  been  entirely  wiped  out,  and 
finally  it  reduced  its  accounts  payable  to  the  extent  of  $  1 79,468.22. 
\Yhy  such  enormous  sums  should  be  expended  lor  additions, 
repairs,  and  material  at  a  time  when  the  United  States  Ship- 
building Company  was  in  urgent  need  of  financial  aid  can  be 
reasonably  accounted  for  only  upon  the  theory  that  it  was  in 
conformity  with  a  deliberate  plan  to  provide  a  plausible  excuse 
for  having  withheld  all  dividends  when  the  crash  should  come 
in  the  affairs  of  the  United  States  Shipbuilding  Company.  Some 
attempt  has  been  made  by  Bethlehem  to  justify  its  retention 
of  its  earnings  by  the  statement  that  its  credit  had  become  im- 
paired, and  it  was  therefore  necessary  to  pay  cash  for  supplies, 
as  well  as  to  reduce  its  accounts  and  bills  payable  in  order  to 
placate  its  creditors.  The  alleged  cause  of  the  impairment  of 
credit  was  said  to  be  a  mortgage  for  $10,000.000  which  the 


214  TRUSTS,    POOLS   AND   CORPORATIONS 

Bethlehem  company  made  to  the  Colonial  Trust  Company  upon 
its  plant  and  property  at  the  time  of  the  purchase  of  Bethlehem 
by  the  United  States  Shipbuilding  Company.  As  further  secur- 
ity to  Mr.  Schwab  for  the  $10,000,000  of  bonds  delivered  to  him 
as  the  purchase  price  of  Bethlehem,  the  Bethlehem  Steel  Com- 
pany executed  to  the  Colonial  Trust  Company  the  mortgage 
above  referred  to  to  secure  a  bond  in  the  like  amount.  Your 
Receiver  is  advised  that  the  execution  and  delivery  of  such  bond 
and  mortgage  by  Bethlehem  to  secure  Mr.  Schwab  for  the 
purchase  price  of  the  sale  of  the  stock  of  the  Bethlehem  was  a 
fraud  upon  the  creditors  of  said  company,  and  was  otherwise 
void  because  of  the  control  of  the  directors  by  Mr.  Schwab.  In 
addition  thereto,  it  is  evident  that  the  impairment  of  credit,  if 
any,  which  Bethlehem  complains  of,  was  the  result  of  its  own 
deliberate,  unwarranted,  and  illegal  act.  Your  Receiver  sub- 
mits, therefore,  that  there  was  no  justification  for  withholding 
from  the  United  States  Shipbuilding  Company  the  entire  earn- 
ings of  the  Bethlehem  company,  and  charges  that  the  inability 
of  the  Shipbuilding  company  to  continue  its  business  was  due  in 
large  part  to  the  failure  of  the  Bethlehem  company  to  relinquish 
its  earnings. 

At  this  point  your  Receiver  desires  to  call  the  attention  of 
the  Court  to  another  matter  somewhat  small  in  comparison  with 
the  enormous  and  unlawful  appropriation  of  stocks  and  bonds 
of  the  United  States  Shipbuilding  Company  above  mentioned, 
but  of  some  importance  in  showing  the  manner  with  which  the 
Bethlehem  company  dealt  with  the  United  States  Shipbuilding 
Company.  At  the  time  of  the  sale  of  the  Bethlehem  Steel  Com- 
pany to  the  United  States  Shipbuilding  Company,  a  statement 
was  made  that  the  amount  of  inventory  was  a  certain  figure. 
After  the  sale  of  the  Bethlehem  company  to  the  United  States 
Shipbuilding  Company,  $2 50,000  of  this  amount  was  charged 
off  by  the  Bethlehem  company,  for  the  purpose  of  adjusting 
the  book  value  of  the  inventory  with  the  actual  value  which 
had  been  placed  thereon  by  the  accountants  after  examination. 
This  examination  had  been  made  in  April,  1902,  and  the  Bethle- 
hem company  had  been  instructed  at  that  time  to  charge  off, 
to  adjustment  of  inventory,  $609,541.95.  Instead  of  complying 


UNITED   STATES   SHIPBUILDING   COMPANY         215 

with  this  request,  they  charged  off  only  $359,541.95,  and  at  the 
time  of  the  sale  of  the  plant  to  the  United  States  Shipbuilding 
Company  the  statement  submitted  contained  a  surplus  $250,000 
in  excess  of  what  Bethlehem  knew  to  be  the  actual  amount. 

Still  another  matter  should  be  brought  to  the  attention  of  the 
Court.  On  the  22d  of  June,  1903,  while  proceedings  were 
pending  for  the  appointment  of  a  receiver  of  the  Shipbuilding 
company,  and,  as  it  seems  to  your  Receiver,  with  a  view  of 
forestalling  the  action  of  the  Court,  and  in  contempt  thereof, 
the  directors  of  said  Company  adopted  a  resolution,  as  provided 
for  under  Mr.  Schwab's  mortgage,  requesting  the  New  York 
Security  Trust  Company  to  vote  the  entire  shares  of  the  capital 
stock  of  the  Bethlehem  Steel  Company  in  favor  of  and  for  the 
following  persons,  as  directors  of  said  Bethlehem  Steel  Com- 
pany, namely,  1C.  M.  Mcllvain,  Archibald  Johnson,  Adolphe  K. 
Boric,  and  Lewis  Nixon.  Mr.  Mcllvain  was  at  that  time  and  is 
now  the  President  of  the  Bethlehem  Steel  Company  ;  Mr.  Boric 
was  and  is  the  Vice-President  of  the  Bethlehem  Steel  Company, 
and  Mr.  Johnson  was  and  is  the  General  Superintendent  of  said 
Company.  As  the  remaining  directors  were  selected  by  Mr. 
Schwab's  trustee,  it  is  apparent  that  but  one  of  the  seven  could 
be  said  to  represent  interests  other  than  those  of  Mr.  Schwab. 
By  this  means,  if  successful,  Mr.  Schwab  was  able  to  place  the 
control  of  Bethlehem  beyond  the  reach  of  the  Court  for  at  least 
another  year. 

BETHLEHEM  STEEL  COMPANY 

From  the  reports  submitted  by  the  officials  of  this  Company, 
it  is  evident  that  during  the  past  year  it  earned  far  more  money 
than  the  necessities  of  the  plant  required  to  be  retained  there. 
From  what  is  hereinabove  set  forth,  it  is  also  evident  that  so 
long  as  the  present  Board  of  Directors,  or  a  Board  subject  to 
present  influences,  shall  retain  office,  no  benefit  shall  ever  be 
permitted  to  escape  to  the  Receivership.  Your  Receiver  is  con- 
vinced that  the  present  controlling  influence  at  this  plant  is 
wholly  hostile  to  the  Shipbuilding  company  and  its  representa- 
tives, and  your  Receiver  believes,  in  vie\v  of  the  excessive  price 
paid  for  its  plant,  that  the  Shipbuilding  company,  or  its  repre- 


2l6  TRUSTS,    POOLS   AND    CORPORATIONS 

sentative,  should  be  permitted  to  have  at  least  some  voice  in  its 
management.  At  present  this  is  denied,  but  your  Receiver  hopes 
that  such  action  may  be  taken  as  may  result  in  the  removal  of  the 
present  Board  of  Directors,  or  a  majority  of  them.  Your  Receiver 
believes  that  the  meeting  of  the  Board  of  Directors  of  the  United 
States  Shipbuilding  Company,  held  on  the  22d  day  of  June, 
1903,  and  hereinbefore  referred  to,  at  which  four  directors  were 
designated  to  represent  the  United  States  Shipbuilding  Company 
on  the  Board  of  the  Bethlehem  Steel  Company,  was  solely  for 
the  purpose  of  circumventing  any  order  of  this  Court  which 
might  be  made  in  the  proceedings  then  pending ;  that  it  was 
intended  to  hinder  and  delay  the  creditors  of  the  United  States 
Shipbuilding  Company  and  to  place  this  property  beyond  their 
control  and  the  control  of  the  Receiver  to  be  appointed,  and  was 
otherwise  illegal  and  void.  Your  Receiver  believes  such  Board 
is  deliberately  furthering  a  course  at  once  illegal  and  greatly 
injurious  to  the  creditors  represented  by  your  Receiver,  and 
accordingly  he  makes  the  recommendation  concerning  this  Com- 
pany hereinafter  set  forth. 

GENERALLY 

Since  the  appointment  of  your  Receiver  the  principal  office 
has  been  engaged  in  legal  matters  rather  than  building  ships. 
Accordingly  your  Receiver  found  the  services  of  several  of  the 
officers  and  subordinates  of  the  Shipbuilding  company  to  be 
unnecessary,  and  in  this  connection  has  reduced  expenses  up- 
wards of  $55,000  a  year. 

RECOMMENDATIONS 

Your  Receiver  respectfully  submits  the  following  recommenda- 
tions : 

1.  That  in  order  to  avoid  depreciation  by  disuse,  and  because 
of  the  existence  of  controversies  as  to  the  validity  of  the  encum- 
brances upon  the  premises,  the  Crescent  Shipyard  be  sold  free 
and  clear  of  all  such  encumbrances  as  soon  as  the  work  now  in 
contemplation  is  completed. 

2.  That  similar  action  be  taken  with  reference  to  the  plant 


UNITED    STATES   SHIPBUILDING   COMPANY         217 

of  the  Harlan  &  Hollingsworth  Company,  Wilmington,  Dela- 
ware. 

3.  That  as  soon  as  the  debts  of  the  Company  shall  have  been 
ascertained  suit  be  instituted  against  all  persons  who  received 
the  stock  of  this  Company  without  paying  full  value  therefor  to 
recover  from  them  such  an  amount  as  shall  be  necessary  to  pay 
said  debts  in  full,  under  section  21  of  an  act  of  the  Legislature 
of  the  State  of  New  Jersey,  entitled,  An  Act  concerning  Corpo- 
rations (Revision  of  1896). 

4.  That  suit  be  instituted  against  the  Bethlehem  Steel  Com- 
pany to  procure  the  appointment  of  a  Receiver  and  to  compel 
the  appropriation  of  the  earnings  of  that  Company  by  way  of 
dividends  on  the  stock. 

Respectfully  submitted, 

JAMES  SMITH,  JR., 
Receiver,  United  States  Shipbuilding  Company. 

Dated  October  31,  1903. 

Certain  other  highly  disreputable  details  of  this  affair,  were  concerned  with 
the  attempts  to  float  the  stock  in  Europe.  Much  of  the  correspondence,  show- 
ing connivance  with  notorious  parties  in  Paris,  was  published  in  the  New  York 
daily  papers  between  December  22,  1903,  and  the  first  of  January,  1904. 
Moody's  Truth  about  the  Trusts,  pp.  366-369,  gives  many  additional  details. 
A  paper  by  L.  W.  Sammis  of  the  New  York  Sun.  published  in  the  Annals  of  the 
American  Academy  of  Political  Science,  1904.  is  also  suggestive.  After  pro- 
tracted controversy  and  litigation,  a  reorganization  plan  was  agreed  upon  and 
published  May  25.  1903:  and  a  new  company  has  just  been  formed  to  take 
over  the  wreck  of  the  old  one.  —  ED. 


X 

PROMOTERS'    LIABILITY   FOR   UNREVEALED 
PROFITS1  — THE   ASPHALT   COMPANIES 

THE  visible  assets  of  Asphalt  Company  of  America  having 
been  sold  and  their  proceeds  distributed,  ...  it  is  proper 
that  the  Court  should  be  informed  of  certain  matters  and  things 
relating  to  the  promotion  of  Asphalt  Company  of  America,  for 
such  action  thereupon  as  the  Court  may  determine  should  be 
taken.  The  facts  hereinafter  set  forth  have  been  ascertained 
through  investigations  made  by  the  Receivers  continuing  from 
immediately  after  their  appointment  up  to  the  present  time. 

Asphalt  Company  of  America  was  incorporated  under  the 
laws  of  the  state  of  New  Jersey,  June -28,  1899,  with  an  author- 
ized capital  stock  of  $30,000,000,  divided  into  600,000  shares  of 
the  par  value  of  $50  each.  The  corporation  was  the  outcome 
of  plans  previously  arranged  by  and  among  some  or  all  of  the 
persons  hereinafter  mentioned  as  promoters,  the  essential  fea- 
tures of  which  were  (i)  the  transfer  to  the  corporation  of  the 
shares  of  stock  of  certain  other  corporations  engaged  in  the 
asphalt  business  and  more  or  less  competitive  in  character, 
and  the  issue  to  the  owners  of  such  shares,  so  transferring 
their  holdings,  of  Collateral  Gold  Certificates,  in  the  nature  of 
bond  obligations  of  the  new  corporation  in  exchange  for  said 
shares  of  stock,  the  terms  of  exchange  being  mutually  arranged, 
the  shares  of  stock  so  transferred  then  being  deposited  with  a 
trust  company  (The  Land  Title  and  Trust  Company  being 
selected)  as  security  for  the  payment  of  the  interest  and  princi- 
pal of  the  said  certificates.  (2)  The  providing  of  working  capital 

1  From  Transcript  of  Record,  U.  S.  Circuit  Court  of  Appeals  for  the  Third  Circuit, 
September  Term,  1903.  The  Land  Title  and  Trust  Co.  v.  Hi-nry  Tatnall  as 
Receiver  of  Asphalt  Co.  of  America,  etc.,  pp.  370-380.  Receiver's  Report  on 
Promoters'  Liability,  etc. 

2iS 


LIABILITY   FOR   UNREVEALED    PROFITS 


219 


for  the  new  corporation  by  calls  upon  its  capital  stock.  In  the 
case  of  the  transfer  of  the  shares  of  stock  by  some  of  the  said 
companies  to  the  new  corporation,  it  was  stipulated  that,  in  addi- 
tion to  the  purchase  price  to  be  paid  in  Collateral  Gold  Certifi- 
cates, the  vendors  should  have  the  privilege  of  purchasing  stock 
of  Asphalt  Company  of  America,  without  premium  at  par,  to  the 
amount  of  50  per  cent  of  the  par  value  of  the  stock  deposited 
by  them.  The  following  is  a  list  of  the  corporations  whose  shares 
of  stock  to  the  amounts  and  on  the  term's  therein  stated  were 
transferred  to  Asphalt  Company,  and  Collateral  Gold  Certificates, 
to  the  amounts  therein  mentioned  paid  therefor : 


NAME  OF  COMPANY 

TOTAL 

No.  OF 

SHAKES 

PAR 
VALUE 

SlMKES 

PUR. 

CHASF.D 

PRICE 
PAID 

COST  IN 
CASH 

COST  IN 
CEKTIFICATF.S 

Barber     Asphalt    Paving 
Company   
The  New  Trinidad  Lake 
Asphalt  Company    . 

Alcatraz      Company      of 
West  Virginia 
United  Asphalt  Company 
Atlantic  Alcatraz  Asphalt 

39,OOO 
50,000 

Soo,OOO 
40,000 

I,OOO 

250 
I,OOO 

I.OOO 

9,500 

250 

35,000 

2,000 
i.;oo 

SlOO.OO 
48.50 

5.00 
IOO.OO 

I  OO.OO 
IOO.OO 

50.00 

IOO.OO 

IOO.OO 
IOO.CO 
1.  00 

IOO.CO 
IOO.OO 

38,993 

49,550 
50 

799,900 
39,975 

995 

245 
995 

995 

9.483 
245 

34,95° 

i  ,90  > 
1.4.0; 

$300.00 

IOO.OO 

84.886 

6.00 
91.808 

IOOO.OO 

1  020.00 
500.00 

150.00 

240.00 
510.21 

5-7M 

64.16 
104.;  i 

$11,697,900.00 
4,955,000.00 

4,799,400.00 
3,670,000.00 

995,000.00 

249,900.00 
497,500.00 

149,250.00 

2,278,320.00 
125,001.45 
199,714.09 

127,999.20 
I  ;:,o  i  :.  i; 

Southern  Asphalt  Paving 

Alcatra/.  Paving  <  'ompanv 
Alcatraz   Asphalt   Paving 

Warren-Scharf      Asphalt 
Paving  ('<  iinpanv 
I'tica  Paving  (  'mnpanv    . 
Denver  1  'a\ing  Company 
Southwestern        A  leaf  rax. 
Asphalt  A:  Construction 

5618.42 

Alcairaz         Construction 

The  evidence  in  the  possession  of  the  Receiver  shows  that  the 
persons  who  transferred  to  Asphalt  Company  of  America  the 
shares  of  stock  in  the  above  named  corporations,  receiving  Col- 


22O 


TRUSTS,    POOLS   AND   CORPORATIONS 


lateral  Gold  Certificates  of  the  former  company  therefor,  had 
been  holders  of  shares  of  stock  of  some  of  the  companies  prior 
to  the  inauguration  of  the  plan  which  was  subsequently  consum- 
mated of  transferring  them  to  Asphalt  Company  of  America. 
In  the  case  of  some  of  the  companies,  however,  some  of  the 
vendors  who  were  connected  with  the  organization  of  Asphalt 
Company  of  America  as  promoters,  purchased  the  whole  or  some 
part  of  the  shares  which  they  exchanged  for  Collateral  Gold  Cer- 
tificates on  the  above  terms,  after  they,  with  others,  had  deter- 
mined upon  such  organization  and  either  while  it  was  in  process 
of  organization  or  after  it  was  actually  incorporated.  The  essen- 
tial purpose  of  this  report  is  to  show  to  the  Court  the  facts  which 
have  come  to  the  Receiver's  knowledge  as  to  those  purchases,  and 
to  recommend  action  thereon. 

The  organization  of  Asphalt  Company  of  America  appears  to 
have  been  under  consideration  as  early  as  March  6,  1899,  and 
to  have  been  entered  upon  very  shortly  thereafter.  At  that  time 
the  following  persons  appear  to  have  been  holders  of  record 
of  shares  of  stock  of  some  of  the  corporations  which  were  sub- 
sequently combined  in  the  manner  above  stated,  to  about  the 
following  amounts : 


BARBER  ASPHALT  PAVING 
COMPANY 

THE  NEW  TRINIDAD  LAKE 
ASPHALT  COMPANY 

Shares 

Shares 

Amzi  L.  Barber  held    .    .     . 

55°7 

4394 

Francis  V.  Greene  held    . 

900 

1822 

George  W.  Elkins  held     . 

I83I 

1639 

J.  J.  Albright  held  .... 

2613 

3050 

Edmund  Hayes  held    .     . 

1264 

2131 

C.  K.  Robinson  held   . 

28l 

997 

E.  Burgess  Warren  held  . 

5^4 

4849 

Wm.  L.  Elkins  held    .     .     . 

500 

— 

Geo.  D.  Widener  held 

1091 

1273 

ALCATRAZ  COMPANY  OF 
WEST  VIRGINIA 

DENVER  PAVING  COMPANY 

William  TT.  Crocker  held 

Shares 
401,320 

Shares 
IS63 

LIABILITY    FOR   UXREVEALED    PROFITS 


221 


ALCATRAZ  PAVINC;  COMPANY 

SOUTHWESTERN  AI.CATRAZ 
&  CONSTRUCTION  COMPANY 

Shares 

Shares 

William 
Harry  C 

J.  I.atta  held 
Spinks  held 

30 

5^5 

Some  of  the  above  named  parties  then  acquired  shares  of 
stock  of  other  companies  subsequently  turned  into  the  combina- 
tion, and  they  also  acquired  more  shares  of  stock  of  some  of  the 
companies  in  which  they  already  had  interests.  Some  of  the 
shares  of  stock  so  acquired  were  then  transferred  to  Asphalt 
Company  of  America,  when  incorporated,  at  prices  payable  in 
Collateral  Gold  Certificates  in  excess  of  the  prices  at  which  they 
were  respectively  obtained  by  the  purchasers,  and  the  Receiver 
believes  that  further  investigation  will  show  that  all  of  said  shares 
were  transferred  by  the  said  purchasers  to  Asphalt  Company  of 
America  at  a  profit.  So  far  as  the  Receiver  knows,  no  disclosure 
to  Asphalt  Company  of  America  was  made  by  the  persons  who 
so  transferred  their  shares  of  stock  to  it  of  the  profits  received 
by  them.  All  of  the  above  named  parties,  it  is  believed,  \vere 
beneficially  interested  in  the  acquisition  of  some  of  said  shares, 
and  in  their  transfer  to  Asphalt  Company  of  America. 

The  facts  in  detail  for  the  consideration  of  the  Court  follow  : 

As  to  United  Asphalt  Company. 

Amzi  L.  Barber,  Francis  V.  Greene  and  George  W.  Elkins 
each  transferred  to  Asphalt  Company  of  America  13,325  shares 
of  stock  of  this  company,  aggregating  39,975  shares.  Amzi  L. 
Barber  and  George  W.  Klkins  each  received  therefor  $1,223,300, 
and  Francis  V.  Greene  received  $1,223,400,  in  Collateral  Gold 
Certificates  of  Asphalt  Company  of  America,  the  said  three  parties 
receiving  as  a  whole  $3, 670,000  of  said  certificates.  At  the  time 
of  said  transfers  United  Asphalt  Company  was  the  holder,  either 
in  its  corporate  name,  or  by  its  representatives,  of  practically 
the  entire  capital  stock  of  four  corporations  known  as  Colum- 
bia Construction  Company,  of  New  York  ;  Trinidad  Bituminous 


222  TRUSTS,   POOLS  AND   CORPORATIONS 

Asphalt  Company,  of  New  Jersey;  Standard  Asphalt  Company, 
of  New  Jersey,  and  Rock  Creek  Natural  Asphalt  Company  of 
Kansas.  The  shares  of  capital  stock  of  these  corporations  con- 
stituted its  entire  assets.  The  evidence  in  the  possession  of  the 
Receiver  points  to  the  fact  that  these  shares  of  stock  were 
bought  by  or  under  the  direction  of  Amzi  L.  Barber,  Francis  V. 
Greene  and  George  W.  El  kins,  with  money  or  obligations  fur- 
nished, or  procured,  by  them  to  be  furnished  as  follows  : 

For  the  stock  of  Columbia  Construction  Company      .         .         .  $250,000 

"             "       Trinidad  Bituminous  Asphalt  Company   .         .  150,000 

"              "        Standard  Asphalt  Company      ....  200,000 

"             "        Rock  Creek  Natural  Asphalt  Company    .         .  18,000 

$618,000 

Said  purchases  were  made  between  March  21  and  August 
4,  1899.  In  the  meantime  United  Asphalt  Company  had  been 
organized  as  a  holding  company,  and  on  July  12,  1899,  13,325 
shares  of  its  capital  stock  were  issued  to  Amzi  L.  Barber,  Francis 
V.  Greene  and  George  W.  Elkins  each,  making  39,975  shares 
in  the  aggregate,  issued  to  them  out  of  a  total  capital  stock  of 
40,000  shares.  The  above  39,975  shares  were  subsequently,  on 
July  15,  1899,  transferred  to  Asphalt  Company  of  America  for 
$3,670,000  of  its  Collateral  Gold  Certificates.  The  first  sales  of 
the  Temporary  Certificates  standing  for  said  Collateral  Gold 
Certificates  were  in  August,  1899,  in  the  neighborhood  of  90 
per  cent  of  par.  Taking  the  value  of  the  Collateral  Gold  Cer- 
tificates at  97  per  cent  of  par,  the  highest  price  at  which  said 
certificates  sold,  the  profit  each  of  the  said  three  parties  to  said 
transaction  was  about  8980,601,  and  to  all  of  them  together  was 
about  $2,941,803.  Taking  the  value  of  the  said  certificates  at 
89.}-  per  cent  of  par,  which  was  their  lowest  market  price  in 
August,  1899,  the  profit  to  each  of  said  parties  was  about 
$888,853.50,  and  to  all  of  them  together  was  about  $2,666,560.50. 

As  to  Warren- Scliarf  Asphalt  Paving  Company. 

Amzi  L.  Barber,  Francis  V.  Greene  and  George  W.  Elkins 
each  transferred  to  Asphalt  Company  of  America  3164  shares 
(George  \V.  Elkins  transferring  3165  shares)  of  stock  of  War- 
ren-Scharf  Asphalt  Paving  Company,  aggregating  9493  shares 


LIABILITY    FOR   UNREVEALED    PROFITS 


223 


out  of  a  total  capital  stock  of  9500  shares.  They  each  received 
therefor  $759,360  (George  W.  Klkins  receiving  $759,600)  in 
Collateral  Gold  Certificates.  The  said  three  persons  received  as 
a  whole  $2,278,320  par  of  said  certificates. 

The  said  three  persons  had  previously  purchased  from  the 
then  owners  the  said  shares  of  stock  at  an  outlay  to  them  of 
about  $1,500,000,  and  the  said  shares  were  transferred  into  their 
names  on  July  27,  1899.  The  transfers  of  said  shares  by  them 
to  Asphalt  Company  of  America  were  made  on  July  31,  1899, 
and  the  above  mentioned  temporary  certificates  of  said  company 
were  issued  to  them  therefor.  Taking  the  value  of  the  Collateral 
Gold  Certificates  at  97  per  cent  of  par,  the  profit  to  each  of  the 
said  three  parties  to  said  transaction  was  about  $236,579,  and  to 
all  of  them  together  was  $709,970.  Taking  the  market  value  of 
the  certificates  at  89.!  per  cent  of  par,  the  profit  to  each  of  the 
said  parties  was  about  $179,627.20,  and  to  all  of  them  together 
about  8539,096. 

From  certain  papers  in  the  possession  of  Receiver  it  would 
appear  that  the  moneys  necessary  to  purchase  said  shares  of 
stock  from  the  preceding  holders  were  contributed  by  the  fol- 
lowing parties  in  the  following  proportions,  and  the  Receiver 
believes  that  distribution  of  Collateral  Gold  Certificates  was 
made  to  said  parties  in  proportion  to  their  contribution  to  pur- 
chase money  as  follows,  and  that  they  shared  the  profits 
proportionately  : 


PAVME- 

Pl'KCHASK 

,'T    or 

MONEY 

DlSTNIWTION  OF 

COLLATERAL 
GOLD  CERTIFICATES 

5176,130 
33-1.426 

76,836 
98.724 
30,894 
75.696 

327,204 

3So,ooo 
3>So,ooo 
3So,ooo 


224  TRUSTS,   POOLS  AND   CORPORATIONS 

As  to  TJie  New  Trinidad  Lake  AspJialt  Company,  Limited. 

Shortly  after  the  organization  of  Asphalt  Company  of  America 
was  projected,  the  Board  of  Directors  of  Barber  Asphalt  Com- 
pany, which  company  owned  1718  shares  of  the  capital  stock  of 
The  New  Trinidad  Lake  Asphalt  Company,  Limited,  caused  said 
shares  to  be  offered  for  sale  to  its  stockholders.  This  action  was 
taken  pursuant  to  the  authorization  of  its  Executive  Committee, 
acting  as  a  Board  of  Directors,  on  March  15,  1899,  and  was  ap- 
proved by  the  Board  on  March  29,  1899,  the  said  Board  of 
Directors  being  composed  at  the  time  of  the  following  persons  : 
J.  J.  Albright,  Amzi  L.  Barber,  Francis  V.  Greene,  Edmund 
Hayes,  C.  K.  Robinson,  George  D.  Widener,  George  W.  Elkins, 
E.  Burgess  Warren,  and  P.  W.  Henry.  1638  of  the  said  shares 
of  stock  of  The  New  Trinidad  Lake  Asphalt  Company,  Limited, 
were  thereupon  bought  by  the  stockholders  of  Barber  Asphalt 
Paving  Company  at  the  limit  fixed  by  the  Executive  Committee 
in  its  resolution  for  their  sale,  to  wit,  $48.50  per  share.  1515 
of  the  said  shares  so  bought  were  purchased  and  paid  for  by  the 
following  persons  who  were  also  Directors  of  Barber  Asphalt 
Paving  Company  at  the  rate  of  $48.50  per  share,  to  wit: 

J.  J.  Albright 210  shares 

Amzi  L.  Barber            .......  206 

Francis  V.  Greene       .         .         .         .         .         .         .178 

Edmund  Hayes  ........  209 

C.  K.  Robinson           .......  103 

George  D.  YYidener    .......  207 

George  W.  Elkins 211 

E.  Burgess  Warren 211 

After  said  purchases  of  said  shares  of  stock  at  $48.50  per 
share,  they  were  transferred  to  Asphalt  Company  of  America  at 
the  valuation  of  $100  per  share  and  Collateral  Gold  Certificates 
were  received  in  exchange  therefor  to  the  amount  in  the  aggregate 
at  par  of  8151.500. 

The  Receiver  believes  it  can  be  established  that  the  said  parties 
shared  in  the  profits  of  said  purchases  and  sales  in  proportion  to 
their  said  holdings. 

Taking  the  Collateral  Gold  Certificates  at  97  per  cent  of  par, 
the  profit  to  said  parties  from  the  said  purchases  and  transfers 


LIABILITY   FOR   UNREVEALED    PROFITS  225 

amounted  to  $73,477.  Taking  the  value  of  the  Collateral  Gold 
Certificates  at  89.]  per  cent  of  par,  the  profit  to  the  said  parties 
amounted  to  $62,515. 

As  to  Alcatraz  Company, 

William  H.  Crocker  transferred  to  Asphalt  Company  of  Amer- 
ica on  or  about  August  3,  1899,  799,650  shares  of  the  capital 
stock  of  Alcatraz  Company  of  West  Virginia.  Prior  to  the 
formation  of  the  plan  of  organization  of  the  Asphalt  Company 
of  America  the  said  Crocker  was  the  holder  of  record  of  401,320 
shares  of  said  company,  the  balance  of  the  holdings  transferred 
by  him  to  Asphalt  Company  of  America,  to  wit,  398,330  shares, 
having  been  acquired  by  him  after  March  8,  1899.  The  Receiver 
has  not  as  yet  been  able  to  obtain  information  as  to  the  amount 
paid  by  the  said  Crocker  for  said  398,330  shares  transferred  into 
his  name  after  the  organization  of  Asphalt  Company  of  America 
was  determined  upon,  nor  what  profit,  if  any,  was  made  by  him 
on  the  purchase  or  other  acquisition  by  him  of  said  shares  and 
the  sale  thereof  to  Asphalt  Company  of  America.  The  said 
shares,  with  the  other  shares  previously  held  by  him  ($5  par 
value),  were  transferred  to  Asphalt  Company  of  America  at  the 
rate  of  S6  per  share,  payable  in  Collateral  Gold  Certificates. 
The  actual  sum  received  by  him  in  Collateral  Gold  Certificates 
for  the  shares  obtained  by  him  after  the  plan  of  organization  of 
Asphalt  Company  of  America  was  determined  upon  was  at  par 
$2,389,980.  The  Receiver  has  reason  to  believe  that  a  substan- 
tial profit  was  made  by  the  said  Crocker  in  said  transaction.  He 
is  advised  that  the  relation  of  the  said  Crocker  to  the  enterprise 
was  that  of  a  promoter,  and  that  whatever  profit  was  obtained  by 
him  he  is  in  law  obliged  to  pay  to  the  Receiver  of  the  Asphalt 
Company  of  America. 

As  to  Denser  Paving  Company. 

The  said  William  H.  Crocker  transferred  to  Asphalt  Company 
of  America  28,725  shares  of  Denver  Paving  Company  stock  at 
the  rate  of  85.71  428/1000  per  share  (the  shares  being  Si  par) 
and  received  in  exchange  therefor  at  par  $164,142.69  in  Collateral 
Gold  Certificates.  He  was  the  holder  of  record  prior  to  the 


226  TRUSTS,   POOLS  AND   CORPORATIONS 

formation  of  the  plan  of  organization  of  Asphalt  Company  of 
America  of  only  1863  of  said  shares.  The  balance  of  his  hold- 
ings transferred  to  Asphalt  Company  of  America  as  aforesaid, 
26,862  shares,  appears  to  have  been  acquired  by  him  after  the 
plan  of  organization  of  Asphalt  Company  of  America  was  entered 
upon.  The  actual  sum  received  by  him  in  Collateral  Gold  Cer- 
tificates for  said  shares,  so  as  aforesaid  subsequently  obtained, 
was  at  par  $153,496.98.  The  Receiver  has  reason  to  believe 
that  a  substantial  profit  was  made  by  the  said  Crocker  in  the 
said  transaction.  He  is  advised  that  the  relation  of  the  said 
Crocker  to  the  enterprise  was  that  of  a  promoter,  and  that 
whatever  profit  was  obtained  by  him,  he  is  in  law  obliged  to  pay 
to  the  Receiver  of  Asphalt  Company  of  America. 

As  to  Alcatraz  Paving  Company. 

William  J.  Latta  transferred  to  Asphalt  Company  of  America, 
in  July,  1899,  305  shares  of  Alcatraz  Paving  Company  ($100 
par)  at  the  rate  of  $500  per  share,  payable  in  Collateral  Gold 
Certificates  of  Asphalt  Company  of  America.  The  actual  sum 
received  by  him  for  the  said  shares,  payable  in  Collateral  Gold 
Certificates  at  par  aforesaid,  was  $152,500.  Prior  to  the  forma- 
tion of  the  plan  of  organization  of  Asphalt  Company  of  America 
the  said  Latta  was  the  holder  of  record  of  only  30  of  said 
shares  of  stock.  He  appears  to  have  acquired  275  of  the  shares 
transferred  to  Asphalt  Company  of  America  as  aforesaid  after 
said  date.  The  actual  sum  received  by  him  in  Collateral  Gold 
Certificates  for  said  275  shares  was  $137,500.  The  Receiver  has 
reason  to  believe  that  a  substantial  profit  was  made  by  the  said 
Latta  in  said  transaction.  He  is  advised  that  the  relation  of  the 
said  Latta  to  the  enterprise  was  that  of  a  promoter  and  that 
whatever  profit  was  obtained  by  him  he  is  in  law  obliged  to  pay 
to  the  Receiver  of  Asphalt  Company  of  America. 

As  to  Southwestern  Alcatraz  AspJialt  &  Construction  Company. 

Harry  C.  Spinks  transferred  to  Asphalt  Company  of  America 
on  or  about  August  10,  1899,  1995  shares  of  the  stock  of  the 
Southwestern  Alcatraz  Asphalt  &  Construction  Company  at  the 
rate  of  $64.16  per  share,  payable  in  Collateral  Gold  Certificates 


LIABILITY    FOR   UN  REVEALED    PROFITS  227 

of  Asphalt  Company  of  America.  He  received  therefor  in  said 
certificates  at  par  $127,999.20.  The  said  Spinks  actually  held 
of  record  prior  to  the  entry  upon  the  plan  of  organization  of 
Asphalt  Company  of  America  only  585  of  said  shares.  The 
evidence  in  the  Receiver's  possession  indicates  that  he  obtained 
from  various  other  persons  after  said  date  1410  of  said  shares 
which  he  transferred  to  Asphalt  Company  of  America  upon  the 
total  consideration  payable  in  Collateral  Gold  Certificates  at  par 
$90,465.60.  The  Receiver  has  not  as  yet  been  able  to  ascertain 
what  profit  the  said  Spinks  made  out  of  the  purchase  of  said 
shares  and  the  transfer  thereof  to  Asphalt  Company  of  America. 
He  is  advised,  however,  that  the  relations  of  the  said  Spinks  to 
the  organization  of  Asphalt  Company  of  America  were  such  that 
he  is  obliged  to  account  for  and  pay  over  whatever  profit  he 
obtained  in  connection  with  the  said  transaction. 

From  the  facts  which  have  come  to  the  knowledge  of  the 
Receiver  he  believes  that  some  or  all  of  the  parties  above  named, 
to  wit,  Amzi  L.  Barber,  Francis  V.  Greene,  George  W.  Elkins, 
J.  J.  Albright,  Edmund  Hayes,  C.  K.  Robinson,  E.  Burgess 
Warren,  William  L.  Elkins,  George  D.  Widener,  Sydney  F. 
Tyler,  William  H.  Crocker,  William  J.  Latta  and  Harry  C. 
Spinks,  can  be  established  to  have  been  promoters  of  Asphalt 
Company  of  America,  and  that  they  made  profits  in  connection 
with  its  organization  in  the  manner  above  stated,  which  they 
are  obliged  to  account  for,  and  that  they  can  be  compelled  to 
account  for  and  pay  over  the  same.  He  therefore  recommends, 
the  premises  considered,  that  he  be  authorized  by  the  Court  to 
take  such  proceedings  against  the  said  parties,  or  any  of  them, 
by  suit  or  suits  in  law  or  equity,  as  he  may  be  advised  are  proper, 
and  as  he  may  deem  expedient  under  the  facts  as  they  exist  and 
shall  be  made  to  appear  upon  further  investigation,  with  a  view 
to  collecting  all  profits  that  were  made  by  the  said  persons,  or 
any  of  them,  in  connection  with  the  organization  of  Asphalt 
Company  of  America  and  the  transfer  of  securities  to  it.  He 
also  recommends  that  he  be  authorized  to  bring  like  proceedings 
against  any  other  persons  whom  he  may  hereafter  ascertain  to 
have  obtained  such  profits. 

He  respectfully  calls  attention  of  the  Court  to  the  fact  that 


228  TRUSTS,   POOLS  AND   CORPORATIONS 

an  Act  of  Limitation  was  passed  by  the  Legislature  of  the  state 
of  New  Jersey  at  the  last  session,  approved  the  8th  day  of  April, 
1903,  which  limits  the  period  during  which  suits  may  be  brought 
against  directors,  officers,  promoters  and  other  agents  of  cor- 
porations of  the  state  to  recover  unlawful  profits  made  by  them, 
to  the  period  of  four  years  from  and  after  the  making  or  receipt 
of  such  profits.  A  saving  clause  being,  however,  incorporated 
in  the  said  Act  which  permits  such  suits  which  otherwise  would 
be  barred  to  be  brought  within  six  months  after  the  Act  took 
effect.  The  result  of  the  passage  of  the  said  Act  is  that  pro- 
ceedings against  promoters  in  connection  with  Asphalt  Company 
of  America  with  a  view  to  the  recovery  of  unlawful  profits  ob- 
tained by  them  as  the  Receiver  is  advised,  must  be  begun  before 
October  8,  1903.  He  therefore  respectfully  urges  upon  the  Court 
the  desirability,  if  it  should  seem  proper  that  the  Court  instruct 
that  any  suits  of  this  kind  be  brought,  that  the  authorization  to 
him  to  so  proceed  be  given  forthwith. 

Respectfully  submitted, 

HENRY   TATXALL, 

Receiver  Asphalt  Company  of  America. 
July  6,  1903. 

It  is  scarcely  to  be  expected  that  a  company  launched  under  the  conditions 
described  in  the  foregoing  report  should  have  a  successful  career.  Two 
reorganizations  promptly  followed  in  less  than  four  years.  The  original 
Asphalt  Company  of  America,  organized  in  July.  1899.  acquired  the  stocks  of 
a  large  number  of  competing  concerns,  issuing  in  payment  therefor  $30.000.000 
of  collateral  trust  bonds.  These  bonds  were  issued  on  the  security  of  the 
stock  so  acquired.  The  next  step  was  to  assure  the  control  of  the  enterprise 
by  the  promoters  through  ownership  of  a  majority  of  the  capital  stock. 
Accordingly  practically  all  of  the  original  stock  subscriptions  were  taken  in 
the  name  of  two  dummies.  A  large  part  of  this  issue  of  original  stock  was 
immediately  turned  over  to  the  promoters,  giving  them  virtual  control  of  the 
enterprise.  The  stock  was  not  paid  for  in  full,  but  an  amount  equivalent  to 
20  per  cent  of  the  par  value,  which  was  $50  per  share,  was  actually  paid. 
The  funds  to  meet  this  partial  payment  on  the  stock  held  by  the  promoters 
were  raised  by  a  sale  of  the  balance  of  the  stock  not  held  by  insiders  to  the 
public  at  prices  ranging  as  high  as  $19  per  share.  Thus  did  the  promoters 
acquire  control  of  the  holding  company  without  any  additional  investment  on 
their  part:  and  at  the  same  time  possess  themselves  of  a  volume  of  bonds, 
which,  on  the  basis  of  the  excessive  payments  described  in  the  preceding 


LIABILITY   FOR   UNREVEALED    PROFITS  229 

report,  proved  more  than  sufficient  to  absorb  the  entire  earnings  of  the 
consolidation. 

The  existence  of  a  stockholders1  liability  for  the  remaining  four-fifths  of  the 
par  value  of  the  capital  stock  was  the  cause  of  the  speedy  reorganization  of 
the  company  in  .May,  1900.  By  reason  of  fraudulent  and  reckless  accounting, 
as  partially  indicated  by  our  preceding  reprint,  the  inevitable  bankruptcy  of 
the  parent  company  was  hidden  from  the  public  temporarily.  In  brief,  the  As- 
phalt Company  of  America  was  superseded  in  May,  1900,  by  a  new  company  enti- 
tled the  National  Asphalt  Company.  This  new  corporation  issued  $6,000.000 
of  Collateral  Gold  Certificates  which  were  used  to  take  up  the  stock  of  the 
old  corporation.  In  addition,  its  own  capital,  amounting  to  $22.000,000,  was 
used  in  part  to  acquire  control  of  formidable  competitors  who  had  invaded 
the  field,  and  in  part  as  a  bonus  to  secure  deposit  of  the  old  underlying  bonds. 
In  December,  1901,  this  company,  in  turn,  went  into  the  hands  of  a  receiver. 
Then  began  a  long  series  of  suits  and  countersuits  in  connection  with  the 
activity  of  a  reorganization  committee  ;  which,  judged  by  results,  seems  to  have 
been  working  in  the  interest  of  insiders.  The  outcome  of  the  matter  was  the 
final  organi/.ation  in  May,  1903,  of  the  General  Asphalt  Company  which  ac- 
quired the  properties  of  its  predecessors,  sold  at  auction  for  a  trifle  over 
$6.000.000.  This  General  Asphalt  Company  was  capitalized  at  $31,000,000, 
in  place  of  $60.000,000  of  stock  and  bonds  issued  by  the  original  Asphalt 
Company  of  America.  The  troublesome  underlying  bonds  of  the  first  com- 
pany were  to  be  retired  by  exchange  for  preferred  stock  ;  .and  the  common 
stock  was  issued  in  part  to  raise  working  capital. 

A  partial  recovery  of  the  enormous  losses  by  innocent  investors  could  be 
effected  only  in  two  ways.  Successful  suits  against  the  promoters  for  unre- 
vealed  profits  in  the  organization  of  the  company  might  be  hoped  for,  fol- 
lowing precedents  in  a  number  of  recent  cases,  notably  that  of  the  East 
Tennessee  Land  Company.  In  addition  it  was  possible  that  the  Receiver 
might  be  able  to  hold  the  original  stockholders  liable  for  the  balance  of  their 
payments  on  the  capital  stock  of  the  Asphalt  Company  of  America.  This  latter 
should  amount  to  about  $24.000.000.  while  at  the  same  time  it  was  hoped  that 
nearly  $3.000.000  could  be  extorted  from  the  promoters.  The  first  of  these 
remedies  against  the  promoters,  however,  has  now  been  closed  through  pur- 
chase by  the  promoters  themselves  of  all  the  outstanding  bonds.  As  repre- 
senting all  the  creditors  of  the  company,  they  have  asked  the  Court  to 
discontinue  the  suits.  This  has  been  done.  Moreover,  the  Receiver  has 
abandoned  the  attempt  to  assess  the  stockholders  for  their  unpaid  capital  stock 
on  the  ground  that  such  suits  cannot  be  successfully  prosecuted.  Thus  closes 
a  story  of  fraud  and  financial  rottenness  not  less  enlightening  than  that  ot 
the  United  States  Shipbuilding  Company,  as  showing  the  necessity  for  provi- 
sion by  law  to  secure  a  reasonable  amount  of  publicity  in  the  finances  of  monop- 
olistic combinations.  —  Ln. 


XI 

TRADE   COMBINATIONS   AT   COMMON    LAW1 


rule  that  all  contracts  in  restraint  of  trade  were  void, 
was  early  established  in  the  English  law.  The  first  case 
in  which  this  principle  was  announced  is  said  to  have  been 
decided  in  the  reign  of  Henry  V.2  In  this  case  an  action  for 
debt  was  brought  on  a  bond,  conditioned  that  the  defendant 
should  not  use  his  art  of  a  dyer's  craft  within  a  certain  city  for 
six  months.  Judge  Hall  declared  the  bond  void,  and  expressed 
his  indignation  at  this  attempt  to  restrain  trade  by  exclaiming, 
"  And,  by  God,  if  the  plaintiff  were  here,  he  should  go  to  prison 
till  he  paid  a  fine  to  the  king."  This  refusal  to  recognize  the 
validity  of  any  contract  in  restraint  of  trade  was  for  a  long  time 
characteristic  of  the  English  law  ;  but  gradually  the  rule  was 
relaxed. 

The  modern  application  of  this  rule  was  very  well  expressed 
by  Judge  Christiancy  in  the  case  of  Hubbard  v.  Miller?  Dis- 
senting from  the  doctrine  sometimes  laid  down,  that  all  contracts 
in  restraint  of  trade  are  prima  facie  or  presumptively  void,  he 
said  : 

If,  considered  with  reference  to  the  situation,  business  and  objects  of 
the  parties,  and  in  the  light  of  all  the  surrounding  circumstances  with 
reference  to  which  the  contract  was  made,  the  restraint  contracted  for 
appears  to  have  been  for  a  just  and  honest  purpose,  for  the  protection 
of  the  legitimate  interests  of  the  party  in  whose  favor  it  is  imposed,  rea- 
sonable as  between  them,  and  not  specially  injurious  to  the  public,  the 
restraint  will  be  held  valid.4 

1  From  the  Political  Science  Quarterly,  Vol.  XII,  1897,  pp.  212-245.  [On  deci- 
sions interpreting  slate  anti-trust  laws  to  1900,  consult  the  (liiarlerly  Journal  of  Eco- 
nomics, Vol.  XIV,  1900,  pp.  416-424.  —  En.] 

-  See  Year  Book,  2  Henry  V,  fol.  5,  pi.  26.  3  27  Mich.,  15. 

4  This  statement  was  really  nothing  but  an  elaboration  of  the  rule  which  had  long 
before  been  laid  down  in  the  English  courts  by  Chief  Justice  Tindal,  in  the  case  of 
Horner  v.  Xeres,  "  Bing.,  743. 

230 


TRADE   COMBINATIONS   AT   COMMON    LAW         231 

Under  this  rule  two  interests  are  to  be  considered,  those  of 
the  parties  to  the  contract  and  those  of  the  public.  As  to  the 
former,  the  rule  was  laid  down  that  no  contract  which  did  not 
benefit  both  parties  to  the  contract  should  be  regarded  as  reason- 
able ;  as  to  the  latter,  no  contract  in  restraint  of  trade  was  to  be 
regarded  as  lawful  which  was  injurious  to  the  public.  As  a  mat- 
ter of  fact,  most  of  the  cases  actually  decided  have  turned  exclu- 
sively on  the  interests  of  the  parties,  and  the  tendency  of  the 
courts  has  therefore  been  to  relax  very  greatly  the  old  rule  of  the 
common  law.  This  tendency  probably  reached  its  culmination 
in  a  case  decided  in  1887,  by  the  New  York  Court  of  Appeals, 
Diamond  Match  Co.  v.  Rocbcr.1  Here  the  Court  was  called 
upon  to  construe  a  contract  made  by  Roeber  with  the  Swift, 
Courtney  &  Beecher  Co.,  the  grantor  of  the  Diamond  Match 
Co.,  in  which  he  agreed  that  he  would  not  within  ninety-nine 
years,  except  in  the  capacity  of  agent  or  employee  of  the  Swift, 
Courtney  &  Beecher  Match  Co.,  directly  or  indirectly  engage  in 
the  manufacture  or  sale  of  friction  matches  in  any  part  of  the 
United  States  except  Nevada  and  Montana.  The  Court  held  the 
contract  to  be  valid,  although  practically  in  general  restraint  of 
trade,  saying: 

When  the  restraint  is  general,  but  at  the  same  time  is  coextensive 
only  with  the  interest  to  he  protected  and  with  the  benefit  meant  to  be 
conferred,  there  seems  to  he  no  good  reason  why  as  between  the  parties 
the  contract  is  not  as  reasonable  as  when  the  interest  is  partial  and  there 
is  a  corresponding  partial  restraint. 

But  the  Court  of  Appeals,  in  making  this  decision,  did  not 
intend  to  depart  from  the  old  rule,  so  far  as  the  maintenance  of 
that  old  rule  was  necessary  for  the  protection  of  the  interest  of 
the  public.  It  said  distinctly: 

Covenants  of  the  character  of  the  one  now  in  question  operate  simply 
to  prevent  the  covenanter  from  engaging  in  the  business  which  he  sells, 
so  as  to  protect  the  purchaser  in  the  enjoyment  of  what  he  has  purchased. 
To  the  extent  that  the  contract  prevents  the  vendor  from  carrying  on 
the  particular  trade,  it  deprives  the  community  of  any  benefit  it  might 

i  106  X.  Y.,  473. 


232  TRUSTS,    POOLS   AND    CORPORATIONS 

derive  from  his  entering  into  competition  ;  but  the  business  is  open  to  all 
others,  and  there  is  little  danger  that  the  public  will  suffer  harm  from  lack 
of  persons  to  engage  in  a  profitable  industry.  Such  contracts  do  not 
create  monopolies  ;  they  confer  no  special  or  exclusive  privilege.  If  con- 
tracts in  general  restraint  of  trade  where  the  trade  is  general  are  void  as 
tending  to  monopolies,  contracts  in  partial  restraint  where  the  trade  is 
local  are  subject  to  the  same  objection,  because  they  deprive  the  local 
community  of  the  services  of  the  covenanter  in  the  particular  trade  or 
calling,  and  prevent  his  becoming  a  competitor  with  the  covenantee. 

And  again : 

Combinations  between  producers  to  limit  production  and  to  enhance 
prices  are  or  may  be  unlawful,  but  they  stand  on  a  different  footing. 

This  case  has  frequently  been  cited,  as  indicative  of  a  change 
in  the  rule  of  the  common  law,  and  as  establishing  the  proposi- 
tion that  in  our  present  economic  conditions  the  policy  of  the 
law  is,  in  order  to  promote  the  greatest  freedom  of  contract,  not 
to  declare  void  contracts  even  in  total  restraint  of  trade.  But 
the  Court  of  Appeals  based  its  decision  upon  the  express  ground 
that  the  public  interest  was  not  involved.  While  holding  valid 
the  particular  contract  before  it,  although  in  general  restraint  of 
trade,  the  Court  specifically  declared  that  combinations  to  raise 
prices  stood  upon  a  different  footing,  and  recognized  the  fact 
that  where  the  public  interest  was  involved,  the  rule  might  well 
be  different.  The  common  law  has  all  along  refused,  and  does 
now  refuse,  to  recognize  the  validity  of  agreements  made  between 
individuals  for  the  purpose  of  raising  the  prices  of  commodities, 
and  has  stamped  any  such  attempt  as  a  criminal  conspiracy. 

i.    AGREEMENTS  AIMING  TO  RAISE  PRICES  ARE  INVALID 

That  such  agreements  are  invalid  has  always  been  the  rule  of 
both  courts  of  equity  and  courts  of  law.  Thus,  take  the  case  of 
Craft  \.  McConotighy.1  This  was  a  bill  in  equity  brought  for 
an  accounting  and  distribution  of  the  profits  of  an  alleged  part- 
nership based  upon  a  contract  to  the  following  effect:  Several 
grain  houses  were  put  into  the  business  upon  a  basis  of  distribut- 

1  79  TIL,  346,  decided  in  1875. 


TRADE    COMBINATIONS   AT   COMMON    LAW         233 

ing  shares  to  the  signers  of  the  agreement ;  each  separate  firm 
was  to  conduct  its  own  business  as  if  there  were  no  partnership 
in  existence.  It  was  to  be  the  duty  of  a  general  bookkeeper  to 
make  a  record  of  all  the  grain  bought  by  each  party,  to  debit  him 
with  the  amount  of  money  paid  for  the  same,  and  to  credit  him 
with  all  sales ;  and  at  the  end  of  every  month  each  individual 
account  was  to  be  balanced,  showing  the  profit  or  loss,  which 
amount  was  to  be  divided  pro  rat  a,  according  to  the  number  of 
shares  held  by  each  party.  It  was  further  agreed  that  prices 
were  to  be  fixed  from  time  to  time,  and  each  party  to  the  agree- 
ment was  to  abide  by  them.  Soon  after  the  agreement  was 
made,  one  party  to  it  died,  and  his  son  demanded  an  accounting. 
The  Court  held  that  the  agreement  was  void,  as  contrary  to  pub- 
lic policy,  and  as  being  an  attempt  to  foster  a  monopoly  and  to 
raise  prices;  and  notwithstanding  the  fact  that  it  had  been  par- 
tially executed,  refused  to  require  an  accounting,  saying:  "The 
complainant  and  the  defendants  were  equally  involved  in  the 
unlawful  combination;  a  court  of  equity  will  assist  neither." 

A  similar  and  even  stronger  case,  decided  in  Pennsylvania, 
is  that  of  Xcstcrv.  TIic  Continental  Brewing  Co.1  Here  an  asso- 
ciation had  been  formed  in  Philadelphia  among  the  brewers, 
for  the  purpose  of  controlling  the  sale  and  fixing  the  price  of 
beer  in  Philadelphia  and  in  Camden  and  Camden  County,  New 
Jersey.  It  was  shown  that  the  plaintiff  had  for  valuable  con- 
sideration obtained  from  a  member  of  the  association  an  assign- 
ment of  a  claim  due  such  member  from  the  association,  without 
knowledge  that  the  claim  was  based  upon  an  agreement  to  mo- 
nopolize the  sale  of  beer.  Notwithstanding  his  bona  fides,  the 
Court  refused  to  aid  him,  and  denied  his  application  for  an 
accounting. 

Not  only  courts  of  equity,  but  also  courts  of  law,  refuse  to  aid 
in  the  execution  of  such  agreements.  Thus,  in  the  case  of 
Lliapin  v.  Jlw'tCii,'1  the  grocers  engaged  in  business  in  the  town 
of  Storm  Lake  agreed  in  favor  of  a  third  person  to  quit  the 
business  of  buying  butter  for  two  years,  and  such  third  person 
agreed  to  carry  on  that  business  exclusively  for  the  same  period 

1  161  Pa.  St..  473,  decided  in  1894. 
"  83  Iowa,  156,  decided  in  1891. 


234  TRUSTS,   POOLS  AND   CORPORATIONS 

of  time.  In  pursuance  of  this  agreement,  the  plaintiffs  came  to 
the  town  and  engaged  in  the  business  of  buying  butter  ;  at  the 
commencement  of  the  suit  they  were  so  engaged,  and  had  made 
arrangements  to  continue  the  business  for  the  period  of  two 
years.  The  defendant,  however,  continued  in  the  business  of 
buying  butter;  and  it  was  alleged  that  by  so  doing  he  had 
damaged  the  plaintiffs  to  the  extent  of  one  hundred  and  fifty 
dollars,  for  which  judgment  was  asked.  The  court  refused  the 
application  of  the  plaintiffs,  on  the  ground  that  the  agreement 
was  against  public  policy,  as  tending  to  monopolize  the  butter 
trade  at  Storm  Lake,  and  to  destroy  competition  in  that  busi- 
ness. This  case  is  particularly  interesting  because  the  agree- 
ment was  as  to  purchase  and  not  as  to  sale.  It  therefore  did 
not  result  in  disadvantage  to  the  consuming  public  generally, 
but  only  in  disadvantage  to  the  producers  of  butter.1 

A  somewhat  similar  case,  More  v.  Bennett,  was  decided  in 
January,  1892,  by  the  Supreme  Court  of  Illinois.2  Here  the 
stenographers  in  the  city  of  Chicago  had  formed  an  association, 
of  which  all  the  parties  to  the  suit  were  members.  The  object 
of  the  association  was  to  establish  and  maintain  uniform  rates. 
A  schedule  had  been  adopted,  and  it  was  alleged  that  the  de- 
fendant, contrary  to  the  rules  of  the  association,  had  cut  rates 
against  the  other  members  thereof,  whereby  the  plaintiffs  had 
been  damaged.  The  Court  refused  to  pass  upon  the  question 
whether  a  contract  could  be  found  in  such  articles  of  association, 
and  decided  that,  even  if  a  contract  could  be  found,  the  agree- 
ment was  void  on  account  of  its  attempt  to  regulate  prices. 
The  Court  refused,  therefore,  to  award  damages  to  the  plaintiff. 
The  case  is  interesting  as  showing  that  the  courts  will  apply  the 
same  rules  to  the  attempt  to  regulate  the  price  of  labor  as  to  the 
attempt  to  regulate  the  price  of  commodities. 

Another  good  case  is  that  of  the  Tc.vns  Standard  Oil  Co.  v. 
Adonc,  decided  in  Texas  in  i8Q2.3  This  suit  was  brought  to 
recover  guaranteed  net  prices  for  all  the  products  of  certain 

1  It  is  only  fair  to  say  that  the  contract  was  declared  void,  not  only  because  it  was 
contrary  to  public  policy,  but  also  because  in  the  opinion  of  the  Court  it  was  not 
based  upon  a  consideration. 

'2  140  111.,  69.  s  83  Tex.,  650. 


TRADE    COMBINATIONS   AT   COMMON    LAW         235 

mills,  and  for  the  costs  and  expenses  of  production,  in  considera- 
tion of  the  strict  performance  of  all  convenants  in  a  contract. 
This  contract,  it  was  held  by  the  Court,  gave  the  defendant  an 
almost  unrestricted  field  to  obtain  the  raw  material  for  its  mills, 
and  the  exclusive  right  to  control,  free  from  the  competition  of 
the  plaintiffs  and  others,  not  only  the  sales  and  ruling  prices 
of  the  product  of  its  own  mills,  but  also  the  entire  yield  of  the 
mills  of  the  other  parties  to  the  contract.  The  Court  held  that 
the  manifest  purpose  and  natural  tendency  of  this  agreement 
were  to  prevent  competition  in  too  many  localities  —  upon  the 
one  hand,  to  reduce  the  price  of  the  raw  materials;  and  upon 
the  other,  to  enhance  that  of  the  manufactured  product  by  arti- 
ficial means,  to  the  disadvantage  and  detriment  of  the  public. 
Therefore  the  complaint  was  dismissed.1 

A  similar  case  is  Arnott  v.  Tlic  Pittston  and  Ehnira  Coal 
Co?-  Here  the  plaintiff's  assignor,  the  Butler  Colliery  Co.,  had 
made  an  agreement  with  the  defendants  that  it  would  not  send 
coal  north  to  any  point  except  to  the  defendants,  the  latter 
agreeing  to  take  from  the  Butler  Co.  not  exceeding  20x30  tons 
of  coal  per  month.  In  pursuance  of  this  agreement,  the  Butler 
Colliery  Co.  shipped  2700  tons  to  The  Pittston  and  Elmira  Coal 
Co.,  and  the  plaintiff,  to  whom  it  had  assigned  its  claim,  brought 
suit  for  the  price  of  the  coal.  The  Court  held  that  the  contract 
was  made  by  the  defendants  with  the  purpose  of  establishing  a 
monopoly  of  coal  in  the  city  of  Klmira,  that  this  purpose  was 
known  to  the  plaintiff's  assignor,  the  Butler  Coal  Co.,  that  the 
contract  was  contrary  to  public  policy,  and  therefore  that  suit 
might  not  be  brought  upon  it.  The  Court  said : 

Every  producer  or  vendor  of  coal  or  other  commodity  has  the  right 
to  use  all  legitimate  efforts  to  obtain  the  best  price  for  the  article  in 
which  he  deals.  But  when  he  endeavors  to  artificially  enhance  prices 
by  suppressing  or  keeping  out  of  market  the  products  of  others,  and  to 
accomplish  that  purpose  by  means  of  contracts  binding  them  to  withhold 

1  This  case,  like  Chctpin  v.  Rrpwii,  noticed  above,  shows  that  the  courts  will  take 
notice  that  the  effect  of  a  comliinatiun  in  restraint  of  trade  is  to  reduce  the  prices  of 
articles  to  he  purchased,  as  well  as  to  increase  the  price  of  articles  to  be  sold  by  the 
combination. 

-  08  X.  V.,  55S,  decided  in  iS;;. 


236  TRUSTS,    POOLS   AND    CORPORATIONS 

their  supplies,  such  arrangements  are  even  more  mischievous  than  com- 
binations not  to  sell  under  an  agreed  price.  Combinations  of  that 
character  have  been  held  to  be  against  public  policy  and  illegal.  .  .  . 
The  purpose  of  the  vendee  was  against  public  policy,  and  the  vendor 
knew  it.  This  brings  us  straight  to  the  question  whether  the  vendor 
delivering  goods  under  such  a  contract  can  recover  for  the  price.  I 
think  that  under  the  circumstances  of  the  present  case,  as  found  by  the 
referee,  he  cannot.  ...  He  had  a  right  to  dispose  of  his  goods,  and 
(under  certain  limitations)  the  vendor  of  goods  may  recover  for  their 
price,  notwithstanding  that  he  knows  that  the  vendee  intends  an  improper 
use  of  them,  so  long  as  he  does  nothing  to  aid  in  such  improper  use,  or 
in  the  illegal  plan  of  the  purchaser.  This  doctrine  is  established  by 
authority,  and  is  sufficiently  liberal  to  vendors.  But  —  and  this  is  a 
very  important  distinction  —  if  the  vendor  does  anything  beyond  mak- 
ing the  sale  to  aid  the  illegal  scheme  of  the  vendee,  he  renders  himself 
particeps  criminis  and  cannot  recover  for  the  price. 

So,  also,  it  has  been  held  that  a  loan  made  for  the  purpose  of 
aiding  in  a  combination  to  raise  the  price  of  a  particular  article, 
cannot  be  recovered.  In  the  case  of  Raymond  v.  Lcavitt,1 
plaintiff  had  loaned  the  sum  of  $10,000  to  the  defendant  for 
the  purpose  of  controlling  the  wheat  market  at  Detroit,  with  a 
view  of  forcing  up  prices.  The  defendant,  who  was  to  give  the 
plaintiff  a  third  of  the  expected  profits,  was  at  all  events  to  repay 
the  $10,000,  with  or  without  profits.  In  rendering  its  decision, 
the  Court  said  : 

The  object  of  the  arrangement  between  these  parties  was  to  force  a 
fictitious  and  unnatural  rise  in  the  wheat  market,  for  the  express  purpose 
of  getting  the  advantage  of  dealers  and  purchasers  whose  necessities 
compelled  them  to  buy,  and  necessarily  to  create  a  similar  difficulty  as 
to  all  persons  who  had  to  obtain  or  use  that  commodity,  which  is  an 
article  indispensable  to  every  family  in  the  country.  .  .  .  We  shall 
decline  enforcing  such  contracts.  If  parties  see  fit  to  invest  money  in 
such  ventures,  they  must  get  it  back  by  some  other  than  legal  measures. 

Probably  the  strongest  case  of  all  is  that  of  Jlforris  Run  Coal 
Co.  v.  Barclay  Coal  Co.2  This  was  an  action  upon  an  accepted 
draft  of  the  defendants  in  favor  of  the  plaintiffs.  The  draft 
was  made  in  execution  of  a  contract  between  five  coal  companies 

1  46  Mich..  447,  decided  in  iSSi. 
•  68  Pa.  St.,  17.},  decided  in  1871. 


TRADE   COMBINATIONS   AT   COMMON    LAW         237 

fora  sum  found  due  in  the  equalization  of  prices  under  the  con- 
tract. Provision  was  made  in  the  contract  for  a  committee  of 
three  to  take  charge  of  the  business  of  all  of  these  companies,  to 
decide  all  questions  and  to  appoint  the  general  sales-agent. 
Provision  was  also  made  for  the  mining  and  delivery  of  coal,  and 
for  its  sale  through  this  agent,  subject,  however,  to  the  restric- 
tion that  each  party  should  at  its  own  cost  deliver  its  propor- 
tion of  the  different  kinds  of  coal  in  the  different  markets,  at 
such  times  and  to  such  parties  as  the  committee  should  from 
time  to  time  direct.  The  committee  was  authorized  to  adjust 
the  price  of  coal  in  the  different  markets,  and  the  rates  of 
freight,  and  also  to  enter  into  such  an  agreement  with  the 
anthracite  coal  companies  as  should  promote  the  interest  of  the 
parties.  The  companies  were  'allowed  to  sell  their  coal  them- 
selves, but  only  to  the  extent  of  their  proportion,  and  only  at 
the  prices  adjusted  by  the  committee.  In  answer  to  the  claim 
that  this  agreement  tended  to  establish  a  monopoly,  the  plain- 
tiff replied  that  the  true  object  of  it  was  to  lessen  expenses,  to 
improve  the  quality  of  the  coal  and  to  deliver  it  in  the  market 
in  the  best  order  to  the  consumer.  These  allegations  the  Court 
said  were  immaterial : 

Admitting  their  correctness,  it  does  not  follow  that  these  advantages 
redeem  the  contract  from  the  obnoxious  effects  so  strikingly  presented 
by  the  referee.  The  important  fact  is  that  these  companies  control  this 
immense  coal-field  ;  that  it  is  the  great  source  of  supply  of  bituminous 
coal  to  the  state  of  New  York  and  large  territories  westward  ;  that  by 
this  contract  they  control  the  price  of  coal  in  this  extensive  market,  and 
make  it  bring  sums  it  would  not  command  if  left  to  the  natural  laws  of 
trade  :  that  it  concerns  an  article  of  prime  necessity  for  many  uses  ;  that 
its  operation  is  general  in  this  large  region,  and  affects  all  who  use  coal 
as  a  fuel  ;  and  this  is  accomplished  by  a  combination  of  all  of  the  com- 
panies engaged  in  this  branch  of  business  in  the  large  region  where  they 
operate.  The  combination  is  wide  in  scope,  general  in  its  influence,  and 
injurious  in  effects.  These  being  its  features,  the  contract  is  against 
public  policy,  illegal,  and  therefore  void. 

Further  commenting  upon  the  agreement,  the  Court  said  : 


238  TRUSTS,    POOLS   AND   CORPORATIONS 

the  contract,  to  wit :  the  combination  resorted  to  by  these  five  com- 
panies. Singly,  each  might  have  suspended  deliveries  and  sales  of  coal 
to  suit  its  own  interests,  and  might  have  raised  the  price,  even  though 
this  might  have  been  detrimental  to  the  public  interest.  There  is  a 
certain  freedom  which  must  be  allowed  to  every  one  in  the  manage- 
ment of  his  own  affairs.  When  competition  is  left  free,  individual  error 
or  folly  will  generally  find  a  correction  in  the  conduct  of  others  ;  but 
here  is  a  combination  of  all  the  companies  operating  in  the  Blossburg  and 
Barclay  mining  regions  and  controlling  their  entire  productions.  .  .  . 
This  combination  has  a  power  in  its  confederative  form  which  no  indi- 
vidual action  can  confer.  The  public  interest  must  succumb  to  it,  for 
it  has  left  no  competition  free  to  correct  its  baleful  influence.  When 
the  supply  of  coal  is  suspended,  the  demand  for  it  becomes  importu- 
nate, and  prices  must  rise.  Or  if  the  supply  goes  forward,  the  price 
fixed  by  the  confederates  must  accompany  it.  ...  Such  a  combina- 
tion is  more  than  a  contract ;  it  is  an  offence.  .  .  .  The  present  case 
is  free  of  difficulty,  the  money  represented  by  the  bill  arising  directly 
upon  the  contract  to  be  paid  by  one  party  to  another  party  to  the  con- 
tract in  execution  of  its  terms.  The  bill  itself  is  therefore  tainted  by 
the  illegality,  and  no  recovery  can  be  had  upon  it. 

While  the  courts  will  not  enforce  an  unlawful  agreement  or 
give  damages  for  the  non-execution  of  an  unlawful  agreement, 
it  does  not  by  any  means  follow  that  they  will  prevent  the 
execution  of  an  agreement  which  is  in  reasonable  restraint 
of  trade.  A  good  case  upon  this  point  is  that  of  the  BoJin 
Manufacturing  Co.  v.  Hollis.1  The  plaintiff  was  a  manufac- 
turer and  vendor  of  lumber  and  other  building  material,  a  large 
and  valuable  part  of  his  trade  being  with  retail  lumber  dealers. 
The  defendant,  the  Northwestern  Lumbermen's  Association, 
was  a  voluntary  association  of  retail  lumber  dealers,  formed  to 
protect  its  members  against  sales  by  wholesale  dealers  and 
manufacturers  to  contractors  and  consumers.  The  method 
employed  by  the  association  was  to  demand  of  every  wholesale 
dealer  who  sold  directly  to  contractors  and  consumers  10  per 
cent  of  the  amount  of  such  sales,  and  to  notify  all  the  retail 
dealers  to  refrain  from  dealing  with  such  wholesale  dealer  until 
the  payment  was  made.  The  plaintiff  in  this  suit,  having  sold 

1  54  Minn.,  223,  decided  in  1893. 


TRADK    COMBINATIONS   AT   COMMON    LAW          239 

directly  to  consumers,  was  requested  to  pay  the  10  per  cent  to 
the  association,  failing  which  payment  the  secretary  of  the 
association  threatened  to  send  to  the  other  retail  dealers  the 
notice  provided  for  in  the  agreement  of  the  association.  Plain- 
tiff demanded  an  injunction  to  restrain  the  issuing  of  these 
notices.  The  Court  refused  the  injunction  ;  it  held  that  the 
agreement  was  not  in  unreasonable  restraint  of  trade  or  unlaw- 
ful, and  recognized  that  it  was  a  general  rule  of  trade  in  every 
department  that  wholesale  dealers  should  refrain  from  selling  at 
retail  within  the  territory  from  which  their  customers  obtain  their 
business. 

What  one  man  may  lawfully  do  singly  [says  the  Court],  t\vo  or  more 
may  lawfully  agree  to  do  jointly ;  the  number  who  unite  to  do  the  act 
cannot  change  its  character  from  lawful  to  unlawful.  The  gist  of  a 
private  action  for  the  wrongful  acts  of  many  is  not  the  combination 
or  conspiracy,  but  the  damage  done  or  threatened  to  the  plaintiff  by 
the  acts  of  the  defendant.  If  the  act  be  unlawful,  the  combination 
of  many  to  permit  it  may  aggravate  the  injury,  but  cannot  change  the 
character  of  the  act.  In  a  few  cases  there  may  be  some  loose  remarks 
apparently  to  the  contrary,  but  they  evidently  have  their  origin  in  a 
confused  and  inaccurate  idea  of  the  law  of  criminal  conspiracy,  and 
in  failing  to  distinguish  between  an  unlawful  act  and  a  criminal  one. 

O  o 

It  can  never  be  a  crime  to  combine  to  commit  a  lawful  act,  but  it 
may  be  a  crime  for  several  to  conspire  to  commit  an  unlawful  act 
which,  if  done  by  one  individual  alone,  although  unlawful,  would  not 
be  criminal.  Hence  the  fact  that  the  defendants  associated  themselves 
to  do  the  act  complained  of  is  wholly  immaterial  in  this  case. 

A  somewhat  similar  case  is  that  of  Cote  v.  Murphy)-  In 
this  case,  workmen  engaged  in  building  trades  had  combined  to 
advance  wages  by  reducing  the  hours  of  labor;  and  associations 
of  employers  in  such  trades  had  combined  and  agreed  not  to 
sell  materials  to  contractors  who  acceded  to  the  demands  of  the 
workmen,  and  to  induce  other  dealers  by  all  lawful  means  not 
to  furnish  such  materials.  The  Court  held  that  such  associations 
ot  employers  were  not  liable  in  damages  for  conspiracy  to  con- 
tractors who,  by  reason  of  the  combination,  were  not  able  to 
procure  all  the  materials  they  could  dispose  of. 


240  TRUSTS,   POOLS  AND   CORPORATIONS 

2.    AGREEMENTS  AIMING  TO  RAISE  PRICES  ARE  CRIMINAL 

The  early  English  and  American  cases,  regarding  labor  as 
in  the  nature  of  a  commodity,  held  very  frequently  that  com- 
binations among  workingmen  for  the  purpose  of  raising  wages 
were,  even  if  unaccompanied  by  any  violence  or  other  unlawful 
acts,  criminal  conspiracies.  One  of  the  earliest  cases  in  this 
country  was  that  of  People  v.  Fisher.1  In  this  case,  certain 
journeymen  shoemakers  had  combined  for  the  purpose  of  fixing 
the  wages  of  members  of  the  combination.  They  were  indicted 
under  a  provision  of  the  New  York  Revised  Statutes  which 
declared  that  if  two  or  more  persons  should  conspire  to  commit 
any  act  injurious  to  trade  or  commerce,  they  should  be  deemed 
guilty  of  a  misdemeanor.  This  provision  is  regarded  as  declara- 
tory of  the  common  law.  The  Court,  in  its  opinion,  declared 
that  a  combination  to  raise  wages  was  injurious  to  trade  or  com- 
merce, adding  : 

It  is  important  to  the  best  interest  of  society  that  the  price  of  labor 
be  left  to  regulate  itself,  or  rather  be  limited  by  the  demand  for  it. 
Combinations  and  confederacies  to  enhance  or  reduce  the  prices  of 
labor  or  of  any  articles  of  trade  or  commerce  are  injurious.  They  may 
be  oppressive  by  compelling  the  public  to  give  more  for  an  article  of 
necessity  or  of  convenience  than  it  is  worth,  or,  on  the  other  hand,  by 
compelling  the  labor  of  the  mechanic  for  less  than  its  value. 

It  is  only  fair  to  say  that  the  Court  was  influenced  in  its 
decision  by  the  fact  that  the  indicted  shoemakers  left  the 
employment  of  a  master  workman,  in  order  to  force  him  to 
discharge  one  who  had  formerly  been  a  member  of  the  shoe- 
makers' association,  but  who  had  refused  to  pay  the  penalty 
fixed  by  the  association  for  violation  of  the  agreement  not  to 
work  for  less  than  a  certain  sum.  It  will  be  seen,  therefore, 
that  in  this  particular  case  the  conspiracy  included  not  only  the 
combination  to  raise  prices,  but  also  something  in  the  nature  of 
a  boycott.  The  Court  remarked  : 

In  the  present  case  an  industrious  man  was  driven  out  of  employment 
by  the  unlawful  measures  pursued  by  the  defendants,  and'an  injury  done 

1  14  Wendell,  9,  decided  in  1835. 


TRADE   COMBINATIONS   AT   COMMON    LAW         241 

to  the  community  by  diminishing  the  quantity  of  productive  labor  and 
of  internal  trade.  ...  He  had  a  right  to  work  for  what  he  pleased. 
His  employer  had  a  right  to  employ  him  for  such  price  as  they  could 
agree  upon.  The  interference  of  the  defendants  was  unlawful ;  its  ten- 
dency is  not  only  to  individual  oppression,  but  to  public  inconvenience 
and  embarrassment.  I  am  of  the  opinion  that  the  offence  is  indictable. 

In  commenting  upon  this  general  subject  of  labor  combina- 
tions, the  supreme  court  of  Pennsylvania,  in  the  case  of  Cote  v. 
Murphy,  already  referred  to,  said  : 

The  fixed  theory  of  courts  and  legislators  .  .  .  was  that  the  price  of 
everything  ought  to  be,  and  in  the  absence  of  combinations,  necessarily 
would  be,  regulated  by  supply  and  demand.  The  first  to  deny  the  justice 
of  this  theory  and  to  break  away  from  it  was  labor;  and  this  was  soon 
followed  by  .  .  .  legislation  .  .  .  relieving  workmen  of  the  penalties  of 
what  for  more  than  a  century  had  been  declared  unlawful  combinations 
or  conspiracies.1  Wages,  it  was  argued,  should  be  fixed  by  the  fair  pro- 
portion labor  had  contributed  in  production.  The  market  price  deter- 
mined by  supply  and  demand  might  or  might  not  be  fair  wages,  often 
was  not,  and.  as  long  as  workmen  were  not  free  by  combinations  to  insist 
upon  their  right  to  fair  wages,  oppression  by  capital,  or  which  is  the 
same  thing,  by  their  employers,  f  >llowed.  It  is  not  our  business  to  pass 
on  the  soundness  of  the  theories  which  prompt  the  enactment  of  statutes. 
One  thing,  however,  is  clear  :  the  moment  the  legislature  relieved  one 
and  by  far  the  larger  number  [.*'/V]  of  the  citi/ens  of  the  commonwealth 
from  the  common-law  prohibitions  against  combinations  to  raise  the 
price  of  labor,  and  by  a  combination  the  price  was  raised,  down  went 
the  foundation  on  which  common-law  conspiracy  was  based,  as  to  that 
particular  subject. 

The  logical  consequence  of  this  change  in  the  law  was,  in 
the  opinion  of  the  Court,  that,  after  employees  had  combined  to 
raise  wages,  anv  combination  made  by  employers  against  raising 
wages  was  not  an  unlawful  conspiracy,  inasmuch  as  the  pur- 
pose of  the  employers  was,  not  to  interfere  with  the  price  of 
labor  as  determined  by  the  common-law  theory,  but  to  defend 
themselves  against  a  demand  made  altogether  regardless  of  the 
price  as  regulated  by  the  supply. 


242  TRUSTS,   POOLS  AND    CORPORATIONS 

A  perusal  of  the  later  decisions  upon  this  subject,  sometimes 
made  as  a  result  of  a  change  in  the  ideas  of  the  judges,  some- 
times made  as  a  result  of  specific  statutes  passed  upon  the  sub- 
ject, must  lead  to  the  conclusion  that  at  the  present  time  a 
combination  of  laborers  for  the  purpose  of  raising  wages,  if  un- 
accompanied by  any  unlawful  act,  — as,  for  example,  a  boycott 
or  violence,  —  is  not  to  be  regarded  as  a  criminal  conspiracy. 
One  of  the  latest  cases  upon  the  subject  is  The  Longshore 
Printing  Co.  v.  Hoivclll  In  this  case  the  Court  held  that  it 
was  not  unlawful  for  a  union  to  make  provision  in  its  by-laws 
for  a  scale  of  wages,  or  for  limiting  the  number  of  apprentices ; 
nor  was  it  unlawful  for  several  or  many  employees  to  agree 
among  themselves  to  quit  their  employer,  in  order  by  so  doing 
to  induce  him  to  confine  his  employment  to  certain  kinds  of 
labor.2 

But  while  the  law  at  the  present  time  is  that  combinations 
of  laborers  to  raise  wages,  when  unaccompanied  by  any  unlawful 
acts,  are  not  criminal  conspiracies,  it  cannot  be  said  that  the  old 
common  law  generally  has  been  thus  changed.  That  is,  not- 
withstanding the  change  made  in  favor  of  labor,  it  is  still  a 
crime  to  combine  for  the  purpose  of  raising  the  price  of  com- 
modities. One  of  the  latest  cases  decided  upon  this  point  is 
People  v.  Sheldon?  In  this  case,  certain  coal  dealers  in  the 
city  of  Lockport  entered  into  an  agreement  to  organize  a  coal 
exchange.  The  object  of  this  exchange  was  to  secure  a  general 
supervision  and  protection  of  the  interests  of  retail  dealers  in 
coal  and  similar  commodities.  It  was  made  the  duty  of  mem- 
bers strictly  to  obey  all  the  provisions  of  the  constitution,  by- 
laws and  resolutions  of  the  exchange.  Any  member  guilty  of 
violating  any  provision  of  the  by-laws,  or  of  conduct  unbecom- 
ing a  member,  or  of  giving  short  weight  or  overweight,  was 
liable  to  forfeit  his  membership.  The  agreement  further  de- 
clared that  the  retail  price  of  coal  should  as  far  as  practicable 

1  26  Oregon,  527,  decided  in  1894. 

2  The  common  law  was  the  same  in  the  case  of  a  combination  of  employers  to 
reduce  wages.     Such  a  combination  was  a  criminal  conspiracy.      Com.  ex  rel.  Chew 
v.  Carlisle,  Brightley's  Report,  Pa.,  36. 

3  139  X.  Y.,  251,  decided  in  1893. 


TRADE    COMBINATIONS   AT   COMMON    LAW          243 

be  kept  uniform  ;  and  that  no  price  should  be  made  at  any  time 
which  should  exceed  a  fair  and  reasonable  advance  over  whole- 
sale rates,  or  which  should  be  higher  than  the  current  price  at 
Rochester  or  Buffalo,  figured  upon  corresponding  freight  tariffs  ; 
and  that  at  no  time  should  the  price  of  coal  at  retail  exceed  by 
more  than  one  dollar  the  wholesale  cost,  except  by  the  unani- 
mous vote  of  all  the  members  of  the  exchange.  A  certain 
member  of  the  exchange  was  indicted,  on  the  ground  that  this 
agreement  constituted  an  unlawful  conspiracy  to  increase  the 
price  of  coal  at  retail  in  the  city  of  Lockport,  and  that  in  pur- 
suance of  it  the  defendant  and  other  members  of  the  exchange 
elected  officers  and  by  resolution  increased  the  price  of  coal 
seventy-five  cents  per  ton.  The  indictment  was  found  under 
section  168  of  the  Penal  Code,  which  is  a  reenactment  of  the 
provision  of  the  Revised  Statutes,  making  it  a  misdemeanor  for 
any  two  or  more  persons  to  conspire  "  to  commit  an  act  injuri- 
ous to  the  public  health,  to  public  morals  or  to  trade  or  com- 
merce." The  trial  judge  submitted  the  case  to  the  jury  upon 
the  proposition  that,  if  the  defendants  entered  into  the  organi- 
zation agreement  for  the  purpose  of  controlling  the  price  of  coal 
and  managing  the  business  of  the  sale  of  coal  so  as  to  prevent 
competition  in  price  between  the  members  of  the  exchange,  the 
agreement  was  illegal ;  and  that  if  the  jury  found  that  this  was 
their  intent,  and  that  the  price  of  coal  was  raised  in  pursuance 
of  the  agreement  to  effect  this  object,  the  crime  of  conspiracy 
was  established. 

The  Court  of  Appeals,  in  deciding  upon  the  propriety  of  this 
charge,  said  : 

The  question  here  does  not,  \ve  think,  turn  on  the  point  whether  the 
agreement  between  the  retail  dealers  in  coal  did,  as  a  matter  of  fact, 
result  in  injury  to  the  public,  or  to  the  community  in  Loekport.  The 
question  is  :  \Vas  the  agreement,  in  view  of  what  might  have  been  done 
under  it,  and  the  fact  that  it  was  an  agreement  the  effect  of  which  was 
to  prevent  competition  among  the  coal  dealers,  one  upon  which  the  law 
affixes  the  brand  of  condemnation?  It  has  hitherto  been  an  accepted 
maxim  in  political  economy  that  "competition  is  the  life  of  trade."  The 
courts  have  acted  upon  and  adopted  this  maxim  in  passing  upon  the 
validity  of  agreements  the  design  of  which  was  to  prevent  competition 


244  TRUSTS,    POOLS   AND    CORPORATIONS 

in  trade,  and  have  held  such  agreements  to  be  invalid.  .  .  .  The  organ- 
ization was  a  carefully  devised  scheme  to  prevent  competition  in  the 
price  of  coal  among  the  retail  dealers  ;  and  the  moral  and  material  power 
of  the  combination  afforded  a  reasonable  guaranty  that  others  would  not 
engage  in  the  business  at  Lockport  except  in  conformity  with  the  rules 
of  the  exchange.  .  .  .  The  gravamen  of  the  offence  of  conspiracy  is 
the  combination.  Agreements  to  prevent  competition  in  trade  are  in 
contemplation  of  law  injurious  to  trade  because  they  are  liable  to  be 
injuriously  used.  ...  If  agreements  and  combinations  to  prevent  com- 
petition in  prices  are  or  may  be  hurtful  to  trade,  the  only  sure  remedy  is 
to  prohibit  all  agreements  of  that  character.  If  the  validity  of  such  an 
agreement  was  made  to  depend  upon  actual  proof  of  public  prejudice  or 
injury,  it  would  be  very  difficult  in  any  case  to  establish  the  invalidity, 
although  the  moral  evidence  might  be  very  convincing.  We  are  of 
opinion  that  the  principle  upon  which  the  case  was  submitted  to  the  jury 
is  sanctioned  by  the  decisions  in  this  state,  and  that  the  jury  were  prop- 
erly instructed  that  if  the  purpose  of  the  agreement  was  to  prevent 
competition  in.  the  price  of  coal  between  the  retail  dealers,  it  was  illegal 
and  justified  the  conviction  of  the  defendant. 

Finally,  it  has  been  held  that  corporations  may  be  guilty  of 
the  crime  of  conspiracy,  and  that  they  are  so  guilty  when  they 
refuse  to  sell  their  products  to  dealers  handling  the  products  of 
rival  companies.1 

3.    "  TRUST  "  AGREEMENTS  JUSTIFY  FORFEITURE  OF  CORPORATE 

CHARTERS 

The  impossibility,  under  the  existing  law,  of  making  contracts 
in  restraint  of  trade  which  would  be  enforced  by  the  courts,  and 
the  danger  that  such  agreements  would  be  followed  by  punish- 
ment, led  to  the  formation  of  agreements  which  took  absolutely 
out  of  the  power  of  the  original  owners  of  a  business  all  con- 
trol over  it.  These  agreements,  commonly  known  as  trust 
agreements,  provided  for  trustees  who  could  operate  a  number 

1  People  v.  Duke  el  al.,  .V.  Y.  Lars  Journal,  Jan.  23,  1897.  ^  would  seem,  how- 
ever, that  rebates  given  on  condition  that  th-j  person  receiving  the  rebate  shall  deal 
exclusively  with  the  person  giving  the  rebate  are  perfectly  legal.  Mogul  Steamship 
Co.  v.  McGregor,  II.  L.  App.  Cases,  1892,  p.  25  ;  Nat.  Distilling  Co.  v.  Cream  City 
Importing  Co.,  86  \\~is.,  352  ;  Olmstead\.  Distilling  and  Cattle  1- ceding  Co.,  77  Fed. 
Rep.,  265. 


TRADE    COMBINATIONS   AT   COMMON    LAW         245 

of  different  enterprises  in  accordance  with  their  own  ideas  of 
what  was  proper,  and  who  could  thus  absolutely  prevent  com- 
petition between  the  parties  to  the  agreements.  Such  an  agree- 
ment usually,  but  not  universally,  provided  for  the  formation  of 
a  corporation  out  of  a  partnership  wherever  a  business  had  been 
conducted  under  the  latter  form.  In  organizing  the  trust  the 
stockholders  in  these  corporations  exchanged  their  stock  for 
trust  certificates  issued  by  trustees,  elected  by  the  persons  in 
interest.  The  trustees,  it  was  believed,  would  thus  become  the 
only  stockholders  known  to  the  law,  and  would  therefore  have 
the  power  of  controlling  the  operations  of  the  corporations 
\vhose  stockholders  had  become  parties  to  the  trust  agreement. 
In  other  words,  the  attempt  was  made  to  prevent  competition  by 
means  of  a  federation  of  corporations. 

This  method  was  very  commonly  employed  in  this  country  for 
almost  a  quarter  of  a  century  without  being  opposed  by  the 
public  authorities.  In  1888,  however,  attention  was  directed  to 
a  trust  agreement  in  the  state  of  New  York,  and  the  attorney- 
general  decided  to  bring  an  action  in  the  nature  of  a  quo  ti'ar- 
ranto  to  forfeit  the  charter  of  a  corporation  whose  stockholders 
had  participated  in  its  formation.  The  matter  was  decided  in 
the  case  of  People  v.  Tlic  XortJi  Ri-rcr  Sugar  Refining  Co.,1 
and  this  decision  was  followed  by  the  supreme  court  of  Ohio  in 
State  v.  Standard  Oil  Co.'2  In  the  New  York  case  the  action 
of  the  stockholders,  even  without  any  formal  action  upon  the 
part  of  the  corporation,  was  held  to  be  corporate  action,  and  to 
be  contrary  to  public  policy ;  the  charter  of  the  corporation 
itself  was  therefore  forfeited.  Judge  Finch,  who  delivered  the 
opinion  of  the  Court,  said  : 

I  think  there  may  be  actual  corporate  conduct  which  is  not  formal 
corporate  action  ;  and  where  that  conduct  is  directed  or  produced  by 
the  whole  body  both  of  officers  and  stockholders,  by  every  living  instru- 
mentality which  can  possess  and  wield  the  corporate  franchise,  that 
conduct  is  of  a  corporate  character,  and  if  illegal  and  injurious  may 
deserve  and  receive  the  penalty  of  dissolution.  .  .  .  The  directors  of  a 
corporation,  its  authorized  and  active  agency,  may  see  the  stockholders 


246  TRUSTS,   POOLS   AND   CORPORATIONS 

perverting  its  normal  purposes  by  handing  it  over  bound  and  helpless  to 
an  irresponsible  and  foreign  authority,  and  omit  all  action  which  they 
ought  to  take,  offer  no  resistance,  make  no  protest,  but  apparently 
acquiesce  as  directors  in  the  wrong  which  as  stockholders  they  have 
themselves  helped  to  commit.  That  is  corporate  conduct,  though  there 
may  be  utter  absence  of  directors'  resolutions.  .  .  .  The  abstract  idea 
of  a  corporation,  the  legal  entity,  the  impalpable  and  intangible  creation 
of  human  thought,  is  itself  a  fiction  and  has  been  appropriately  described 
as  a  figure  of  speech.  It  serves  very  well  to  designate  in  our  minds  the 
collective  action  and  agency  of  many  individuals  as  permitted  by  the 
law,  and  the  substantial  inquiry  always  is  :  What,  in  a  given  case,  has 
been  that  collective  action  and  agency?  As  between  the  corporation 
and  those  with  whom  it  deals,  the  manner  of  its  exercise  usually  is  mate- 
rial. But  as  between  it  and  the  state  the  substantial  inquiry  is  only  what 
that  collective  action  and  agency  has  done,  and  what  it  has  in  fact 
accomplished  ;  what  has  seemed  to  be  its  effective  work  ;  what  has  been 
its  conduct?  It  ought  not  to  be  otherwise.  The  state  gave  the  fran- 
chise, the  charter,  not  to  the  impalpable,  intangible  and  almost  nebulous 
fiction  of  our  thoughts,  but  to  the  corporators,  the  individuals,  the  acting 
and  living  men,  to  be  used  by  them,  to  redound  to  their  benefit,  to 
strengthen  their  hands  and  add  energy  to  their  capital.  If  it  is  taken 
away,  it  is  taken  from  them  as  individuals  and  corporators,  and  the  legal 
fiction  disappears.  The  benefit  is  theirs ;  the  punishment  is  theirs ; 
and  both  must  attend  and  depend  upon  their  conduct.  And  when  they 
all  act  collectively  as  an  aggregate  body  without  the  least  exception,  and 
so  acting  reach  results  and  accomplish  purposes  clearly  corporate  in 
their  character,  and  affecting  the  vitality,  the  independence,  the  utility 
of  the  corporation  itself,  we  cannot  hesitate  to  conclude  that  there  has 
been  corporate  conduct  which  the  state  may  review  and  not  be  defeated 
by  the  assumed  innocence  of  a  convenient  fiction. 

In  the  Ohio  case  the  reasoning  on  this  head  was  very  similar.1 
In  both  of  these  cases,  however,  the  judges  felt  called  upon  to 
consider  the  further  question  whether  the  act  which  had  thus 

1  Judge  Marshall  said:  "The  general  proposition  that  a  corporation  is  to  be 
regarded  as  a  It.- gal  entity  existing  separate  and  apart  from  the  natural  persons 
composing  it  is  not  disputed.  But  that  the  statement  is  a  mere  fiction  existing  only 
in  idea  is  well  understood  and  not  controverted  by  any  one  who  pretends  to  accurate 
knowledge  on  the  subject.  .  .  .  Now,  so  long  as  a  proper  use  is  made  of  the  fiction 
that  a  corporation  is  an  entity  apart  from  its  shareholders,  it  is  harmless,  and,  because 
convenient,  should  not  be  called  in  question  ;  but  where  it  is  urged  to  an  end  sub- 
versive of  its  policy,  or  such  is  the  issue,  the  fiction  must  be  ignored  and  the  question 


TRADE   COMBINATIONS   AT   COMMON    LAW         247 

taken  the  form  of  a  corporate  act  was  sufficiently  injurious  and 
contrary  to  public  policy  to  justify  the  forfeiture  of  the  charter. 
Here  the  decisions  were  somewhat  divergent.  In  New  York 
the  Court  held  that  the  act  of  which  the  corporation  had  been 
guilty  was  in  excess  of  its  powers,  and  that  the  charter,  there- 
fore, was  forfeited.  The  combination  of  sugar  refineries  was 
declared  to  partake  of  the  nature  of  a  partnership  of  corpora- 
tions, and  hence  to  be  in  violation  of  law.  There  was  in  the 
opinion  a  dictum  as  to  the  injurious  effects  of  monopolies  upon 
the  public ;  but  the  Court  in  terms  declined 

to  advance  into  the  wider  discussion  over  monopolies  and  competition 
and  restraint  of  trade,  and  the  problems  of  political  economy.  .  .  . 
Without  either  approval  or  disapproval  of  the  views  expressed  upon 
that  branch  of  the  case  by  the  courts  below,  we  are  enabled  to  decide 
that  in  this  state  there  can  be  no  partnerships  of  separate  and  inde- 
pendent corporations,  whether  directly  or  indirectly,  through  the 
medium  of  the  trust ;  no  substantial  consolidations  which  avoid  and 
disregard  the  statutory  permissions  and  restraints  ;  but  that  manufac- 
turing corporations  must  be  and  remain  several,  as  they  were  created, 
or  one  under  the  statute.1 

In  the  dictum  with  regard  to  monopolies,  there  were  several 
very  interesting  statements,  indicative  of  the  opinion  of  the 
Court  as  to  the  public  policy  of  permitting  combinations  whose 

determined  whether  the  act  in  question,  though  done  by  shareholders,  that  is  to  say, 
by  the  persons  united  in  one  body,  was  done  simply  as  individuals  and  with  respect 
to  their  individual  interests  as  shareholders,  or  was  done  ostensibly  as  such  but,  as  a 
matter  of  fact,  to  control  the  corporation  and  affect  the  transaction  of  its  business  in 
the  same  manner  as  if  the  act  had  been  clothed  with  all  the  formalities  of  a  corporate 
act.  This  must  be  so  because,  the  stockholders  having  a  dual  capacity  and  capable 
of  acting  in  either,  and  a  possible  interest  to  conceal  their  character  when  acting  in 
their  corporate  capacity,  the  absence  of  the  formal  evidence  of  the  character  of  the 
act  cannot  preclude  judicial  inquiry  on  the  subject.  If  it  were  otherwise,  then  in  one 
department  of  the  law  fraud  would  enjoy  an  immunity  awarded  to  it  in  no  other." 

1  The  statutes  here  referred  to  permitted  the  consolidation  of  manufacturing  cor- 
porations, and  the  Court  in  a  previous  part  of  the  opinion  seemed  to  intimate  that  a 
consolidation  under  the  statute  would  have  been  perfectly  proper,  inasmuch  as  "the 
resultant  combination  would  itself  be  a  corporation  deriving  its  existence  from  the 
state,  owing  duties  and  obligations  to  the  state,  and  subject  to  the  control  and  super- 
vision of  the  state,  and  not  [as  in  the  case  presented]  an  unincorporated  board,  a 
colossal  and  gigantic  partnership,  having  no  corporate  functions  and  owing  in- 
corporate alletiiance." 


248  TRUSTS,    POOLS   AND   CORPORATIONS 

purpose  or  effect  is  to  promote  monopolies.  The  public  interest 
which  corporate  grants  are  always  assumed  to  subserve  is  most 
unfavorably  affected,  said  Judge  Finch, 

when  beyond  their  own  several  aggregations  of  capital  they  compact 
them  all  into  one  combination  which  stands  outside  of  the  ward  of 
the  state,  which  dominates  the  range  of  an  entire  industry  and  puts 
upon  the  market  a  capital  stock  proudly  defiant  of  actual  values  and 
capable  of  an  unlimited  expansion.  It  is  not  a  sufficient  answer  to 
say  that  similar  results  may  be  lawfully  accomplished  ;  that  an  indi- 
vidual having  the  necessary  wealth  might  have  bought  all  of  these 
refineries,  manned  them  with  his  own  chosen  agents,  and  managed 
them  as  a  group  at  his  sovereign  will ;  for  it  is  one  thing  for  the  state 
to  respect  the  rights  of  ownership  and  protect  them  out  of  regard  to 
the  business  freedom  of  the  citizen,  and  quite  another  thing  to  add  to 
that  possibility  a  further  extension  of  those  consequences  by  creating 
artificial  persons  to  aid  in  producing  such  aggregations.  The  indi- 
viduals are  few  who  hold  in  possession  such  enormous  wealth,  and 
fewer  still  who  peril  it  all  in  a  manufacturing  enterprise  ;  but  if  cor- 
porations can  combine  and  mass  their  forces  in  a  solid  trust  or  part- 
nership with  little  added  risk  to  the  capital  already  embarked,  without 
limit  to  the  magnitude  of  the  aggregation,  a  tempting  and  easy  road 
is  open  to  enormous  combinations  vastly  exceeding  in  number  and  in 
strength  and  in  their  power  over  industry  any  possibilities  of  individual 
ownership;  and  the  state,  by  the  creation  of  the  artificial  persons  con- 
stituting the  elements  of  the  combination  and  failing  to  limit  and 
restrain  their  powers,  becomes  itself  the  responsible  creator,  the  vol- 
untary cause  of  an  aggregation  of  capital  which  it  simply  endures  in 
the  individual  as  the  product  of  his  free  agency.  What  it  may  bear  is 
one  thing ;  what  it  should  cause  and  create  is  quite  another. 

In  the  Ohio  case  the  Court  declared  the  action  of  the  corpo- 
rations which  formed  the  trust  to  be  void,  as  contrary  to  public 
policy,  on  the  ground  that  the  attempt  was  made  to  form  a 
monopoly.  The  judge  said  that  the  object  of  the  agreement 

was  to  establish  a  virtual  monopoly  of  the  business  of  producing 
petroleum  and  of  manufacturing,  refining  and  dealing  in  it  and  all  its 
products  throughout  the  entire  country,  and  by  which  it  might  not 
merely  control  the  production,  but  the  price,  at  its  pleasure.  All  such 
associations  are  contrary  to  the  policy  of  our  state  and  void.  .  .  . 


TRADE    COMBINATIONS   AT   COMMON    LAW         249 

Much  has  been  said  in  favor  of  the  object  of  the  Standard  Oil  Trust 
and  what  it  has  accomplished.  It  may  be  true  that  it  has  improved 
the  quality  and  cheapened  the  cost  of  petroleum  and  its  products  to 
the  consumer.  Hut  such  is  not  one  of  the  usual  or  general  results  of 
a  monopoly,  and  it  is  the  policy  of  the  law  to  regard  not  what  may, 
but  what  usually  happens.  Experience  shows  that  it  is  not  wise  to  trust 
human  cupidity  where  it  has  the  opportunity  to  aggrandize  itself  at  the 
expense  of  others.  .  .  .  Monopolies  have  always  been  regarded  as  con- 
trary to  the  spirit  and  policy  of  the  law.  The  objections  are  stated  in 
"The  Case  on  Monopolies,"  Dairy  \.  Al/cin,  Coke,  Pt.  XI,  84  b.  They 
are  these  :  (i)  ''That  the  price  of  the  same  commodity  will  be  raised, 
for  he  who  has  the  sole  selling  of  any  commodity  may  well  make  the 
price  as  he  pleases  "  ;  (2)  "The  Incident  to  a  monopoly  is  that  after  the 
monopoly  is  granted,  the  commodity  is  not  so  good  and  merchantable 
as  it  was  before,  for  the  patentee,  having  the  sole  trade,  regards  only 
his  private  benefit  and  not  the  commonwealth  "  ;  (3)  "  It  tends  to  the 
impoverishment  of  divers  artificers  and  others  who  before,  by  the  labor 
of  their  hands  in  their  art  or  trade,  had  maintained  themselves  and  their 
families,  who  will  now  of  necessity  be  constrained  to  live  in  idleness  and 
beggary."  The  third  objection,  though  frequently  overlooked,  is  none 
the  less  important.  A  society  in  which  a  few  men  are  the  employers 
and  a  great  body  are  merely  employees  or  servants  is  not  the  most 
desirable  in  a  republic  ;  and  it  should  be  as  much  the  policy  of  the  laws 
to  multiply  the  numbers  engaged  in  independent  pursuits,  or  in  the 
profits  of  production,  as  to  cheapen  the  price  to  the  consumer.  Such 
policy  would  tend  to  an  equality  of  fortunes  among  its  citizens,  thought 
to  be  so  desirable  in  a  republic,  and  lessen  the  amount  of  pauperism  and 
crime.  It  is  true  that  in  the  case  just  cited  the  monopoly  had  been 
created  by  letters  patent  ;  but  the  objections  lie  not  to  the  manner  in 
which  the  monopoly  is  created.  The  effect  on  industrial  liberty  and  the 
price  of  commodities  will  be  the  same,  whether  created  by  patent  or  by 
an  extensive  combination  among  those  engaged  in  similar  industries 
controlled  by  one  nimagement.  By  the  invariable  laws  of  human 
nature,  competition  will  be  excluded  and  prices  controlled  in  the  interest 
of  those  connected  with  the  combination  or  trust.1 

1  A  similar  derision  was  made  by  the  supreme  court  <>f  Xcbra^ka  in  S/,n'e  v. 
/V<'/'n7.>'!v  /'/.  tilling  ('(>.,  2)  Xeb.,  700,  decided  in  iSuo.  See  also  M,it'orv  v.  ILni- 
uiit-r  Oil  Il'i-rA's,  ,S  S.  \Y.  Rep.  '  Tenn.,  iSsS  ,  wh-re  suit  was  brought  against  trus- 
tees of  a  trust  agreement  by  a  corporation  wliii.li  \\as  a  party  to  such  agreement  to 
recover  possession  of  its  propertv.  Judgment  was  given  in  favor  of  the  plaintiff  on 
the  gro-.mil  that  the  corporation  could  not  enter  into  such  an  agreement,  which  the 
Court  considered  to  be  a  partnership  ot  corporations. 


250  TRUSTS,    POOLS  AND   CORPORATIONS 

4.    ARE  CORPORATIONS  FOR  PURPOSES  OF  MONOPOLY  ILLEGAL? 

The  effect  of  the  foregoing  and  similar  decisions  was  that 
any  persons  who  intended  to  form  a  combination  for  the  pur- 
pose of  limiting  competition  were  obliged  to  seek  a  substitute 
for  the  trust  agreement.  As  a  general  thing  they  effected  an 
organization  in  the  shape  of  a  large  corporation,  since,  as  has 
been  shown,  the  New  York  Court  of  Appeals  had  appeared  to 
regard  this  as  a  legal  method  of  forming  a  combination.  The 
courts  were  soon  required  to  decide  upon  the  legality  of  such 
action.  The  first  case  that  came  up  was  that  of  People  v. 
The  Chicago  Gas  Trust  Co.1  A  gas  trust  company,  as  it  was 
called,  had  been  formed,  in  whose  certificate  of  incorporation 
the  purposes  of  the  corporation  were  stated  to  be  the  manufac- 
ture of  gas  and  the  purchase,  holding  and  selling  of  stocks  in 
other  gas  and  electric  companies  in  Chicago  or  elsewhere  in 
Illinois.  Quo  ivarranto  was  brought  against  the  corporation  to 
obtain  judgment  of  ouster  against  its  use  of  the  franchise  to 
purchase  and  hold  or  sell  the  capital  stock  of  other  companies. 
It  was  clearly  admitted  on  both  sides  that  the  Court  was  not 
precluded  from  examining  into  the  legality  of  the  exercise  of 
this  franchise  by  the  fact  that  the  certificate  of  incorporation 
had  been  approved  and  filed  with  the  proper  executive  officers 
of  the  state.  The  general  incorporation  act  of  the  state  per- 
mitted the  formation  of  corporations  in  the  manner  provided  by 
it  for  any  lawful  purpose.  The  question  which  arose  was,  there- 
fore, whether  the  corporation  in  question  had  been  formed  for 
a  lawful  purpose. 

In  answering  this  question  the  Court  found  that  one  result  of 
the  exercise  of  this  franchise  by  the  Chicago  Gas  Trust  Company 
would  be  that  it  could  control  the  four  other  companies  in 
Chicago.  The  control  of  these  four  companies,  it  was  thought, 
would  suppress  competition  among  them,  and  thus  build  up  a 
virtual  monopoly  in  the  manufacture  and  sale  of  gas.  The  Court 
said  : 

Whatever  tends  to  prevent  competition   between   those  engaged   in   a 
public   employment  or   business   impressed  with   a  public  character  is 

1  130  111..  268,  decided  in  1889. 


TRADE    COMBINATIONS   AT   COMMON    LAW         251 

opposed  to  public  policy,  and  therefore  unlawful.  Whatever  tends  to 
create  a  monopoly  is  unlawful,  as  being  contrary  to  public  policy. 

It  therefore  held  that 

if  contracts  and  grants  whose  tendency  is  to  create  monopolies  are  void 
at  common  law,  then  where  a  corporation  is  organized  under  a  general 
statute,  a  provision  in  the  declaration  of  its  corporate  purposes,  the 
necessary  effect  of  which  is  the  creation  of  a  monopoly,  will  also  be  void. 

Further  on  in  the  opinion  it  is  stated  : 

To  create  one  corporation  for  the  express  purpose  of  enabling  it  to  con- 
trol all  the  corporations  engaged  in  a  certain  kind  of  business,  and 
particularly  a  business  of  a  public  character,  is  not  only  opposed  to  the 
public  policy  of  the  state,  but  is  in  contravention  of  the  spirit,  if  not  the 
letter,  of  the  constitution. 

The  Court  also  cited  with  approval  the  following  views 
expressed  by  the  supreme  court  of  Georgia  in  the  case  of 
Central  Railroad  Co.  v.  Collins)- 

All  experience  has  shown  that  large  accumulations  of  property  in 
hands  likely  to  keep  it  intact  for  a  long  period  are  dangerous  to  the 
public  weal.  Having  perpetual  succession,  any  kind  of  a  corporation 
has  peculiar  facilities  for  such  accumulations,  and  most  governments  have 
found  it  necessary  to  exercise  great  caution  in.  their  grants  of  corporate 
powers.  Even  religious  corporations  professing,  and  in  the  main  truly, 
nothing  but  the  general  good,  have  proven  obnoxious  to  this  objection, 
so  that  in  England  it  was  long  ago  found  necessary  to  restrict  them  in 

O  O          O  s 

their  powers  of  acquiring  real  estate.  Freed  as  such  bodies  are  from  the 
sure  bound  to  the  schemes  of  individuals,  the  grave,  they  are  able  to 
add  field  to  field  and  power  to  power  until  they  become  entirely  too 
strong  for  that  society  which  is  made  up  of  those  whose  plans  are  limited 
by  a  single  life. 

For  these  reasons  judgment  of  ouster  was  issued  against  the 
Chicago  Gas  Trust  Company,  as  to  the  exercise  of  the  franchise 
of  purchasing  the  stocks  in  other  gas  companies. 

All  the  cases  thus  far  considered  certainly  give  evidence  that 
the  courts  of  this  country  regard  any  combination,  whatever 
form  it  may  take,  whose  tendency  or  whose  purpose  is  to  form 
a  monopoly,  as  contrary  to  public  policy  and  illegal  at  common 

1  40  (la.,  582,  decided  in  1869. 


252  TRUSTS,    POOLS   AND   CORPORATIONS 

law  ;  but  none  of  them,  not  even  the  last,  distinctly  declares 
unlawful  the  formation  of  a  corporation  whose  purpose  or  whose 
effect  is  to  promote  monopoly.  This  question  it  remained  for 
the  supreme  court  of  Illinois  to  consider  in  the  case  of  the 
Distilling  &  Cattle  Feeding  Co.  v.  The  Peopled 

In  view  of  the  decisions  which  the  courts  were  almost  univer- 
sally rendering  as  to  the  illegality  of  trust  agreements,  the  holders 
of  trust  certificates  in  the  Distillers'  &  Cattle  Feeders'  Trust, 
commonly  called  The  Whiskey  Trust,  had  in  February,  1890, 
adopted  a  recommendation  of  the  trustees  to  form  a  corporation 
with  a  capital  stock  of  $35,000,000.  The  corporation  was  there- 
after organized.  The  trustees  of  the  former  trust  subscribed 
for  all  the  stock  of  the  new  corporation  and  elected  themselves 
its  first  directors.  They,  or  so  many  of  them  as  were  necessary 
to  constitute  a  majority  of  the  directors  of  each  of  the  corpora- 
tions composing  the  trust,  also  ordered  a  conveyance  of  all  the 
property  which  those  corporations  held,  to  the  newly  formed 
corporation  ;  and  as  directors  of  these  corporations,  they  exe- 
cuted to  the  Distilling  &  Cattle  Feeding  Company  a  transfer  of 
all  of  the  property  of  these  corporations,  and  surrendered  to  the 
holders  of  the  trust  certificates  the  shares  of  stock  in  the  newly 
formed  corporation  in  return  for  the  trust  certificates.  The  new 
corporation  subsequently  purchased  the  property  and  business 
of  other  corporations  not  parties  to  the  former  trust  agreement. 
Suit  was  brought  against  the  new  corporation,  and  judgment  of 
ouster  from  its  franchise  was  demanded,  on  the  ground  that  it 
had  created  a  monopoly  in  the  manufacture  and  output  of  dis- 
tillery products,  and  secured  such  control  over  the  consumers 
thereof  as  to  destroy  all  competition  in  the  manufacture  and  sale 
of  such  products  throughout  the  United  States. 

The  Court,  in  rendering  its  opinion,  said  : 

There  can  be  no  doubt,  \ve  think,  that  the  Distillers'  c\:  Cattle  Feeders' 
Trust,  which  preceded  the  incorporation  of  the  defendant,  was  an  organ- 
ization which  contravened  well-established  principles  of  public  policy, 
and  that  it  was  therefore  illegal.  [The  new  corporation  succeeded]  to 
the  trust,  and  its  operations  are  to  be  carried  on  in  the  same  way,  for 
the  same  purposes  and  by  the  same  agencies  as  before.  The  trust  then 

1  156  Til.,  .i4S,  ,!L-ci<]c«l  in  1895. 


TRADE   COMBINATIONS   AT   COMMON    LAW         253 

being  repugnant  to  public  policy  and  illegal,  it  is  impossible  to  see  why 
the  same  is  not  true  of  the  corporation  which  succeeds  to  it  and  takes 
its  place.  The  control  exercised  over  the  distillery  business  of  the 
country  —  over  production  and  prices  —  and  the  virtual  monopoly 
formerly  held  by  the  trust  are  in  no  degree  changed  or  relaxed,  but  the 
method  and  purposes  of  the  trust  are  perpetuated  and  carried  out  with 
the  same  persistence  and  vigor  as  before  the  organization  of  the  corpo- 
ration. There  is  no  magic  in  a  corporate  organization  which  can  purge 
the  trust  scheme  of  its  illegality,  and  it  remains  as  essentially  opposed  to 
the  principles  of  sound  public  policy  as  when  the  trust  was  in  existence. 
It  was  illegal  before  and  is  illegal  still,  and  for  the  same  reasons. 

In  answer  to  the  objection  that  the  defendant  corporation  by 
its  charter  was  authorized  to  purchase  and  own  distillery  prop- 
erty, and  that  there  was  no  limit  placed  upon  the  amount  of 
property  which  it  might  thus  acquire,  the  Court  said  : 

It  should  be  remembered  that  grants  of  powers  in  corporate  charters 
are  to  be  construed  strictly,  and  that  what  is  not  clearly  given  is  by  im- 
plication denied.  The  defendant  is  authorized  to  own  such  property  as 
is  necessary  to  carry  on  its  distillery  business,  and  no  more.  Its  power 
to  acquire  and  hold  property  is  limited  to  that  purpose,  and  it  has  no 
power  by  its  charter  to  enter  upon  a  scheme  of  getting  into  its  hands 
and  under  its  control  all,  or  substantially  all,  the  distillery  plants  and  the 
distillery  business  of  the  country,  for  the  purpose  of  controlling  produc- 
tion and  prices,  of  crushing  out  competition,  and  of  establishing  a  virtual 
monopoly  in  that  business.  All  such  purposes  are  foreign  to  the  powers 
granted  by  the  charter.  Acquisitions  of  property  to  such  extent  anil  for 
such  purpose  do  not  come  within  the  authority  to  own  the  property 
necessary  for  the  purpose  of  carrying  on  a  general  distillery  business.  In 
acquiring  distillery  properties  in  the  manner  and  for  the  purposes  shown 
by  the  information,  the  defendant  has  not  only  misused  and  abused  the 
powers  granted  by  its  charter,  but  has  usurped  and  exercised  powers  not 
conferred  by.  but  which  are  wholly  foreign  to,  that  instrument.  It  has 
thus  rendered  itself  liable  to  prosecution  by  the  state  by  quo  warranto. 
We  are  of  the  opinion  that  upon  the  facts  shown  by  the  information,  the 
judgment  of  ouster  is  clearly  warranted. 

A  case  involving  somewhat  similar  questions  is  that  of  TJic 
People  v.  'JJic  Milk  F.xcliangc,  decided  by  the  New  York  Court 
of  Appeals.1  The  Milk  Exchange  bad  ninety-odd  stockholders, 

1  145  X.  V.,  20-,  dcu. 


254  TRUSTS,   POOLS   AND   CORPORATIONS 

a  large  majority  of  whom  were  milk  dealers  in  the  city  of  New 
York,  or  creamery  or  milk-commission  men  doing  business  in 
that  vicinity.  At  the  first  meeting  of  the  exchange  after  its 
incorporation,  the  following  among  other  by-laws  was  adopted  : 
"  The  board  of  directors  shall  have  the  power  to  make  and  fix 
the  standard  or  market  price  at  which  milk  shall  be  purchased 
by  the  stockholders  of  this  company."  Acting  upon  this  by-law, 
the  board  of  directors  from  time  to  time  fixed  the  price  of  milk 
to  be  paid  by  dealers,  and  the  prices  so  fixed  largely  controlled 
the  market  in  and  about  the  city  of  New  York. 

The  court,  in  deciding  the  case,  declared  its  conviction  that 
there  was  a  combination  on  the  part  of  milk  dealers  and  cream- 
ery men  in  and  about  the  city  of  New  York  to  fix  and  control 
the  price  that  they  should  pay  for  milk ;  and  that  a  case  was 
presented  in  which  the  jury  might  have  found  that  the  combi- 
nation referred  to  was  inimical  to  trade  and  commerce,  and 
therefore  unlawful.  Accordingly,  the  charter  was  declared 
forfeited. 

It  may  be  claimed  [the  Court  said]  that  the  purpose  of  the  combina- 
tion was  to  reduce  the  price  of  milk  and,  it  being  an  article  of  food,  such 
reduction  was  not  against  public  policy.  But  the  price  was  fixed  for  the 
benefit  of  the  dealers,  and  not  the  consumers,  and  the  logical  effect  upon 
the  trade  of  so  fixing  the  price  by  the  combination  was  to  paralyze  the 
production  and  limit  the  supply,  and  thus  leave  the  dealers  in  a  position 
to  control  the  market,  and  at  their  option  to  enhance  the  price  to  be 
paid  by  the  consumers. 

This  case  is  interesting  as  showing  that  the  courts  will  take 
cognizance  of  an  attempt  through  a  combination  in  the  form  of 
a  corporation  to  lower  the  price  of  commodities  to  the  detriment 
of  the  producer  as  well  as  of  an  attempt  to  enhance  the  price  at 
the  expense  of  the  consumer. 

5.    ATTITUDE  OF  THE  UNITED  STATES  SUPREME  COURT 

Notwithstanding  the  decisions  thus  far  considered,  persons 
who  desired  to  form  a  trade  combination  were  able  to  do  so 
with  impunity,  on  account  of  the  fact  that  if  their  organization 
was  declared  illegal  in  one  state,  they  could  organize  under  the 


TRADE    COMBINATIONS   AT   COMMON    LAW         255 

laws  of  another,  provided  the  public  opinion  in  the  latter  was 
not  opposed  to  trade  combinations.  An  attempt  was  therefore 
made  in  what  is  known  as  the  Anti-Trust  Law,  passed  by  Con- 
gress in  1890,  to  give  the  national  government  the  power,  in 
addition  to  that  which  the  states  already  possessed,  to  suppress 
trade  combinations.  But  it  was  recognized  by  the  promoters  of 
this  bill  that  Congress  had  no  jurisdiction  of  specifically  state 
industry  and  commerce.  The  act  was,  therefore,  worded  as 
follows  :  "  Every  contract,  combination  in  the  form  of  trust  or 
otherwise,  or  conspiracy  in  restraint  of  trade  or  commerce  among 
the  several  states  or  with  foreign  nations  is  hereby  declared  to 
be  illegal."  •  Every  one  participating  in  such  a  contract  or  en- 
gaging in  such  a  combination  was  declared  to  be  guilty  of  a 
misdemeanor,  and  made  liable  to  severe  punishment.  It  was 
provided  that  the  circuit  courts  of  the  United  States  should  have 
jurisdiction  to  restrain  violations  of  the  act,  and  that  it  should 
be  the  duty  of  the  law  officers  of  the  United  States  to  institute 
the  proper  proceedings.  A  suit  was  begun  in  Pennsylvania 
against  certain  sugar-refining  corporations  which  had  been  ab- 
sorbed by  the  American  Sugar  Refining  Company.  Evidence 
was  taken  before  Judge  Butler,  of  the  Circuit  Court,  who  said  in 
his  opinion:  "The  object  in  purchasing  the  Philadelphia  re- 
fineries wag  to  obtain  a  greater  influence  or  more  perfect  control 
over  the  business  of  refining  and  selling  sugar  in  this  country." 
The  opinion  also  showed  that,  after  the  purchase  of  these 
refineries  by  the  American  Sugar  Refining  Company,  the  latter 
corporation  had  obtained  control  of  all  refineries  in  the  United 
States  except  one  in  Boston,  whose  output  was  about  two  per 
cent  of  the  sugar  refined  in  this  country. 

This  case  went  on  appeal  to  the  Supreme  Court  of  the  United 
States.1  Here,  on  the  state  of  facts  presented  by  Judge  Butler, 
the  Court  held  that  the  act  of  1890  was  framed  in  the  light  of 
well-settled  principles  ;  that 

Congress  did  not  attempt  thereby  to  assert  the  power  to  deal  with  mo- 
nopoly directly  as  such,  or  to  limit  and  restrict  the  rights  of  corporations 
created  by  the  states  or  the  citizens  of  the  states  in  the  acquisition, 


256  TRUSTS,    POOLS   AND   CORPORATIONS 

control  or  disposition  of  property,  or  to  regulate  or  prescribe  the  price 
or  prices  at  which  such  property  or  the  products  thereof  should  be 
sold,  or  to  make  criminal  the  acts  of  persons  in  the  acquisition  and  con- 
trol of  property  which  the  states  of  their  residence  or  creation  sanctioned 
or  permitted.  .  .  .  The  contracts  and  acts  of  the  defendants  related 
exclusively  to  the  acquisition  of  the  Philadelphia  refineries  and  the  busi- 
ness of  sugar-refining  in  Pennsylvania,  and  bore  no  direct  relation  to 
commerce  between  the  states  or  with  foreign  nations.  ...  It  is  true 
that  the  bill  alleged  that  the  products  of  these  refineries  were  sold  and 
distributed  among  the  several  states,  and  that  all  the  companies  were 
engaged  in  trade  or  commerce  with  the  several  states  and  with  foreign 
nations.  But  this  was  no  more  than  to  say  that  trade  and  commerce 
served  manufacture  to  fulfil  its  functions.  ...  It  does  not  follow  that 
an  attempt  to  monopolize  or  the  actual  monopoly  of  the  manufacture 
was  an  attempt,  whether  executory  or  consummated,  to  monopolize 
commerce,  even  though  in  order  to  dispose  of  the  product  the  instru- 
mentality of  commerce  was  necessarily  invoked.  .  .  .  There  was  nothing 
in  the  proofs  to  indicate  any  intention  to  put  a  restraint  upon  trade  or 
commerce  ;  and  the  fact,  as  we  have  seen,  that  trade  or  commerce  might 
be  indirectly  affected  was  not  enough  to  entitle  the  claimants  to  a  decree. 
The  subject-matter  of  the  sale  was  shares  of  manufacturing  stock,  and 
the  relief  sought  was  the  surrender  of  property  which  had  already  passed 
and  the  suppression  of  the  alleged  monopoly  in  manufacture  by  the 
restoration  of  the  status  quo  before  the  transfers  ;  yet  the  act  of  Con- 
gress only  authorized  the  circuit  courts  to  proceed  by  way  of  preventing 
and  restraining  violations  of  the  act  in  respect  of  contracts,  combina- 
tions or  conspiracies  in  restraint  of  interstate  or  international  trade  or 
commerce. 

It  will  be  noticed  that  this  decision  was  based  upon  three 
grounds  :  (i)  that  the  proper  remedy  was  not  invoked,  or  at  any 
rate  was  not  invoked  at  the  proper  time;  (2)  that  the  combina- 
tion did  not  disclose  an  attempt  to  monopolize  ;  (3)  that,  even  if 
it  did  so,  it  was  not  a  combination  in  restraint  of  interstate  or 
foreign  commerce. 

As  to  the  first  of  these  grounds,  it  may  be  said  that  the  bill 
which  was  before  the  court  asked  that  an  injunction  might  issue 
to  prevent  and  restrain  the  said  defendants  from  further  and 
continued  violations  of  the  act  of  Congress.  This  was  in  addi- 
tion to  the  demand  that  the  agreements  between  the  defendants 
be  cancelled  and  that  the  shares  of  stock  transferred  in  perform- 


TRADE    COMBINATIONS   AT   COMMON    LAW          257 

ance  of  the  contracts  be  restored  to  their  original  owners.1  As 
to  the  second  ground  of  the  decision,  the  trial  judge  found,  as 
has  been  stated,  that  the  object  in  purchasing  the  Philadelphia 
refineries  was  to  obtain  a  greater  influence  or  more  perfect  con- 
trol over  the  business  of  refining  and  selling  sugar  in  this  coun- 
try. Moreover,  the  state  courts,  in  the  decisions  heretofore 
cited,  have  declared  that  they  will  go  back  of  any  alleged  pur- 
pose of  an  agreement  or  of  a  certificate  of  incorporation  and 
will  inquire  what  is  its  real  purpose  and  effect ;  and  that  if  the 
latter  are  to  establish  a  monopoly  unreasonably  limiting  compe- 
tition, they  will  declare  the  agreement  void. 

But  while  these  first  two  considerations  undoubtedly  influenced 
the  Supreme  Court  somewhat,  the  main  ground  upon  which  the 
decision  was  based  was  that  the  manufacture  and  sale  of  sugar 
were  not  interstate  or  foreign  commerce.  In  order  to  reach  this 
decision,  the  Court  laid  little  stress  upon  the  purpose  to  monopo- 
lize the  sale.  The  sale  of  sugar  was  declared  to  be  merely  an 
incident  to  the  manufacture.  As  the  Court  said,  "  trade  and 
commerce  serve  manufacture  to  fulfil  its  functions."  Laying 
the  weight  which  they  did  upon  the  manufacture,  they  consid- 
ered that  they  were  bound  by  the  case  of  Kidd  v.  Pearson'1 
Here  the 

question  was  discussed  whether  the  right  of  a  state  to  enact  a  statute  pro- 
hibiting within  its  limits  the  manufacture  of  intoxicating  liquors,  except 
for  certain  purposes,  could  be  overthrown  by  the  fact  that  the  manufac- 
turer intended  to  export  the  liquors  when  made  ;  and  it  was  held  that 
the  intent  of  the  manufacturer  did  not  determine  the  time  when  the 
article  or  product  passed  from  the  control  of  the  state  and  belonged  to 
commerce,  and  that  therefore  the  prohibitory  act  was  not  in  conflict 
with  the  constitutional  provision  giving  the  right  to  regulate  interstate 
commerce  to  Congress. 

1  Judge  ITarlan,  in  his  dissenting  opinion,  said  on  this  point  :  "While  a  decree 
annulling  the  contracts  under  which  the  combination  in  question  was  formed  may 
not  in  view  of  the  facts  disclosed  be  effectual  to  accomplish  the  object  of  the  act  of 
1890,  I  perceive  no  difficulty  in  the  way  of  the  court  passing  a  decree  declaring  that 
that  combination  imposes  an  unlawful  restraint  upon  trade  and  commerce  among 
the  states  and  perpetually  enjoining  it  from  further  prosecuting  any  business  pursuant 
to  the  unlawful  agreements  under  which  it  was  formed  or  by  which  it  was  created.1' 

-  128  I".  S.,  i. 


258  TRUSTS,   POOLS  AND   CORPORATIONS 

Another  case  which  seems  to  have  influenced  the  Court  was 
that  of  Coev.  Erroll.1  Here  the  question  was  "whether  certain 
logs  cut  at  a  place  in  New  Hampshire  and  hauled  to  a  river  town 
for  the  purpose  of  transportation  to  the  state  of  Maine  were  lia- 
ble to  be  taxed  like  other  property  in  the  state  of  New  Hamp- 
shire ";  and  it  was  held  that  they  were  liable  to  taxation  just 
as  much  as  any  other  property  in  the  state,  and  that  the  own- 
er's intention  and  his  partial  preparation  to  ship  them  out  of 
the  state  would  not  exempt  them  from  taxation  as  articles  of 
interstate  commerce. 

Judge  Harlan,  in  a  dissenting  opinion,  pointed  out,  however, 
that,  under  previous  decisions  of  the  Supreme  Court,  interstate 
commerce  embraced  something  more  than  the  mere  physical 
transportation  of  articles  of  property  and  the  vehicles  or  vessels 
by  which  such  transportation  was  effected.  He  referred  in 
particular  to  the  case  of  Mobile  County  v.  Kimball?  where 
it  was  said  that  commerce  with  foreign  countries  and  among 
the  states,  strictly  considered,  consists  "in  intercourse  and 
traffic,  including  in  these  terms  navigation  and  transportation 
and  transit  of  persons  or  property,  as  well  as  the  purchase,  sale 
and  excJtangc  of  commodities."  Judge  Harlan  did  not  consider 
that  these  early  statements  and  decisions  had  been  modified  by 
either  of  the  cases  referred  to  in  the  majority's  opinion.  As 
regards  the  question  of  monopoly,  .he  said  : 

A  combination  such  as  that  organized  under  the  name  of  the  Ameri- 
can Sugar  Refining  Company  has  been  uniformly  held  by  the  courts  of 
the  states  to  be  against  public  policy  and  illegal  because  of  its  neces- 
sary tendency  to  impose  improper  restraints  upon  trade. 

And  further : 

The  object  of  this  combination  was  to  obtain  control  of  the  busi- 
ness of  making  and  selling  refined  sugar  throughout  the  entire  coun- 
try. Those  interested  in  its  operations  will  be  satisfied  with  nothing 
less  than  to  have  the  whole  population  of  America  pay  tribute  to  them. 
That  object  is  disclosed  upon  the  very  face  of  the  transactions  described 
in  the  bill,  and  it  is  proved — 'indeed  conceded  —  that  that  object 'has 
been  accomplished  to  the  extent  that  the  American  Sugar  Refining 

1  116  1.*.  S.,  517.  -  102  U.  S.,  691. 


TRADE   COMBINATIONS  AT   COMMON    LAW         259 

Company  now  controls  98  per  cent  of  all  the  sugar-refining  business  in 
the  country,  and  therefore  controls  the  price  of  that  article  everywhere. 
Now  the  mere  existence  of  a  combination  having  such  an  object  and 
possessing  such  extraordinary  power  is  itself  under  settled  principles  of 
law  —  there  being  no  adjudged  case  to  the  contrary  in  this  country  — a 
direct  restraint  of  trade  in  the  article  for  the  control  of  the  sales  of 
which  in  this  country  that  combination  was  organized.  And  that 
restraint  is  felt  in  all  the  states  for  the  reason  known  to  all,  that  the 
article  in  question  goes,  was  intended  to  go  and  must  always  go  into 
commerce  among  the  several  states  and  into  the  homes  of  people  in 
every  condition  of  life. 

Finally,  Judge  Harlan  argued  for  the  public  policy  of  the 
Anti-Trust  Law  in  the  following  language : 

We  have  before  us  the  case  of  a  combination  which  absolutely  con- 
trols, or  may  at  its  discretion  control,  the  price  of  all  refined  sugar 
in  this  country.  Suppose  another  combination  organized  for  private 
gain  and  to  control  prices  should  obtain  possession  of  all  the  large 
flour  mills  in  the  United  States  ;  another  of  all  the  grain  elevators  ; 
another  of  all  the  oil  territory  ;  another  of  all  the  salt-producing 
regions  ;  another  of  all  the  cotton-mills  ;  and  another  of  all  the  great 
establishments  for  slaughtering  animals  and  the  preparation  of  meats. 
What  power  is  competent  to  protect  the  people  of  the  United  States 
against  such  dangers  except  a  national  power — -one  that  is  capable 
of  exerting  its  sovereign  authority  throughout  every  part  of  the  territory 
and  over  all  the  people  of  the  nation? 

The  decision  of  the  United  States  Supreme  Court,  holding 
that  the  manufacture  and  sale  of  commodities  were  not,  as  not 
being  objects  of  interstate  commerce,  subject  to  the  regulation 
of  Congress,  was  therefore  not  reached  without  protest ;  but  the 
Court  was  so  nearly  unanimous  in  its  decision  as  to  justify  the 
belief  that  the  decision  itself  will  not  be  reversed  in  the  imme- 
diate future.1  The  experiences  of  the  states  and  the  arguments 
advanced  by  Judge  Harlan  in  his  dissenting  opinion  would  lead 
also  to  the  belief  that  the  regulation  of  these  trade  combinations 
by  the  states  is  practically  impossible.  Any  attempt  at  efficient 
resrulation  must  come  from  the  national  government. 


260  TRUSTS,    POOLS   AND   CORPORATIONS 

In  view  of  the  fact  that  great  insistence  was  laid  in  the  last 
presidential  campaign  upon  the  necessity  of  some  efficient  regu- 
lation of  combinations  in  restraint  of  trade,  it  may  be  well  to 
summarize  the  views  that  the  courts  have  expressed  as  to  the 
impolicy  of  permitting  these  combinations  to  exist  and  of  recog- 
nizing or  enforcing  in  any  way  contracts  for  executing  their 
purposes. 

The  reasons  given  by  the  courts  for  their  attitude  may  be 
classified  under  three  heads, — economic,  social  and  political. 
The  economic  reasons  are  two  in  number.  In  the  first  place,  it 
is  believed  by  the  courts  that  a  combination  in  restraint  of  trade 
and  tending  to  promote  a  monopoly  will  result  either  in  the  sale 
of  a  depreciated  article  to  the  public,  or  in  an  enhancement  of 
the  price  of  the  article  which  is  so  controlled.  This  was  the 
important  economic  reason  at  the  basis  of  the  decision  in  the 
time  of  Queen  Elizabeth,  relative  to  monopolies  granted  by 
the  crown.  This  reason  has  had  so  much  weight  with  the  courts 
that  they  have  refused  to  investigate  the  question  whether  such 
has  been  the  effect  of  a  combination.  They  have  simply  de- 
clared that  the  possession  of  monopoly  powers  by  any  combi- 
nation must  inevitably  result  in  an  enhancement  of  price  or  in  a 
depreciation  in  the  quality  of  the  article  sold.  Their  reasoning 
here,  it  will  be  noticed,  is  distinctly  a  priori ;  and  so  long  as 
they  adhere  to  this  principle,  it  will  be  impossible  to  prove  by 
reference  to  actual  facts  whether  it  is  based  upon  the  truth  or 
not.  The  second  economic  argument  advanced  by  the  courts 
in  support  of  their  policy  is  that  the  fixing  by  any  combination 
of  the  price  of  raw  materials  injures  the  producer  of  the  raw 
material,  and  will  ultimately  result  in  disadvantage  to  the 
consumer. 

The  social  argument  against  combinations  also  dates  from  the 
time  of  Elizabeth.  A  monopoly,  the  Court  said, 

tends  to  the  impoverishment  of  divers  artificers  and  others  who  before 
by  the  labor  of  their  hands  in  their  art  or  trade  have  maintained  them- 
selves and  their  families,  who  will  now  of  necessity  be  constrained  to  live 
in  idleness  and  beggary. 

In  the  form  in  which  it  is  put,  this  argument  would  seem  to  rest 


TRADE    COMBINATIONS   AT   COMMON    LAW         261 

on  a  misapprehension  of  the  conditions  caused  by  monopolies  ; 
and  if  applied  in  as  broad  a  way  as  it  is  stated  in  this  case,  it 
would  be  available  against  the  introduction  of  all  labor-saving 
machinery.  In  the  Ohio  case  of  TJic  State  v.  The  Standard  Oil 
Co.,  already  referred  to,  this  argument  was  somewhat  modified. 
The  Court  took  the  ground,  not  so  much  that  the  formation  of 
the  combination  throws  great  numbers  of  individuals  out  of  em- 
ployment, as  that  the  development  of  monopolies  transforms 
great  numbers  of  persons  formerly  independent  into  employees 
or  servants.  This  argument,  though  treated  by  the  Ohio  court 
as  a  development  of  the  view  of  the  English  court  in  the  case 
of  monopolies,  is  really  quite  different  in  character.  A  further 
argument  of  a  social  character  is  to  be  found  in  the  opinion  of 
Judge  Finch  in  the  Sugar  Trust  case.  He  based  the  right  of  the 
state  to  limit  the  activity  of  corporations,  as  distinct  from  that  of 
individuals,  on  the  ground  that  a  direct  grant  of  corporate  powers 
would,  if  these  powers  were  not  limited,  aid  in  the  aggregation 
of  wealth  in  a  few  hands.  Me  did  not  desire  to  limit  the  right  of 
individual  action,  but  merely  claimed  that  when  specific  powers 
which  can  only  exist  as  a  result  of  the  grant  of  the  state  are 
exercised  by  individuals,  they  become  rightly  subject  to  regula- 
tion in  the  interest  of  the  state  as  a  whole.  It  is  one  thing,  said 
he,  for  the  state  to  respect  the  rights  of  ownership  and  protect 
them  out  of  regard  to  the  business  freedom  of  the  citizen  ; 
but  it  is  quite  another  thing  for  the  state  positively  to  promote 
the  aggregation  of  capital  by  creating  artificial  persons  such  as 
corporations,  without  limiting  their  powers. 

The  political  reason  advanced  by  the  courts  for  their  position 
with  regard  to  trade  combinations  is  perhaps  as  well  stated  as 
anywhere  by  the  supreme  court  of  Georgia.  Here  it  is  pointed 
out  that  all  large  accumulations  of  property  in  hands  likely  to 
keep  it  intact  for  a  long  period  are  dangerous  to  the  public  weal. 
In  England  it  was  found  necessary  to  limit  the  amount  oi  prop- 
erty which  even  religious  corporations  might  possess,  notwith- 
standing the  fact  that  they,  far  more  than  trading  bodies,  might 
be  expected  to  exercise  their  powers  for  the  general  good. 
Given  the  privilege  of  legal  immortality,  corporations,  it  was 
held,  are  apt  to  "become  entirely  too  strong  for  that  society 


262  TRUSTS,    POOLS   AND   CORPORATIONS 

which  is  made  up  of  those  whose  plans  are  limited  by  a  single 
life." 

Such  are  the  rules  of  law  in  the  United  States  with  regard 
to  the  legality  of  trade  combinations,  and  such  are  the  reasons 
which  the  courts  have  advanced  for  the  adoption  of  these  rules. 
If  these  reasons  are  not  sound,  if  the  conditions  of  society  are 
not  what  they  were  when  these  rules  were  adopted  and  these 
reasons  were  first  advanced,  it  would  be  well  that  the  rules  of 
law  be  changed.  Changes  may  be  made  by  legislation,  as  has 
very  generally  been  done  in  the  case  of  labor  combinations.  If, 
on  the  other  hand,  these  reasons  are  now  sound  and  the  rules  of 
law  based  thereon  are  at  the  present  time  in  accordance  with 
public  policy,  some  method  ought  to  be  provided  for  their  effi- 
cient enforcement.  This,  it  has  been  pointed  out,  can  in  the 
cases  of  the  largest  combinations  now  in  existence  be  done  only 
through  the  modification  of  the  present  rule  of  the  United  States 
Supreme  Court  with  regard  to  national  regulation  of  monopolies; 
or,  in  case  the  Supreme  Court  shall  not  see  fit  to  modify  its  rules, 
by  the  adoption  of  a  constitutional  provision  giving  the  Congress 
of  the  United  States  the  necessary  powers. 

FRANK  J.  GOODNOW. 


XII 

INTERPRETATION    AND    AMENDMENT    OF   THE 
SHERMAN    ANTI-TRUST   ACT1 

I  HAVE  the  honor  to  submit,  in  response  to  your  request,  the 
following  statements  under  the  three  heads  which  you  have 
indicated,  namely  :  The  questions  which  have  been  decided  by 
the  courts,  the  questions  which  are  pending  in  the  courts,  and 
suggestions  respecting  further  legislation. 

I.     QUESTIONS    WHICH    HAVE    BEEN    DECIDED    BY    THE 

COURTS 

The  act  of  July  2,  1890,  entitled  "  An  act  to  protect  trade  and 
commerce  against  unlawful  restraints  and  monopolies,"  has 
been  before  the  Supreme  Court  of  the  United  States  in  the  fol- 
lowing cases : 

United  States  v.  E.  C.  Knight  Co.,  156  U.  S.,  i  ; 

United  States  v.  Trans-Missouri  Freight  Association,  166 
U.  S.,  290 ; 

United  States  \.  Joint  Traffic  Association,  171  U.  S.,  5°5  j 

[~nitcd  States  v.  Hopkins,  171  U.  S.,  578; 

Anderson  v.  United  States,  171  U.  S.,  604;  and 

Addyston  Pipe  and  Steel  Co.  v.  United  States,  175  U.  S.,  2 1 1. 

In  the  Knight  case  there  was  involved  an  alleged  monopoly 
in  the  production  of  sugar,  commonly  known  as  the  "  sugar 
trust  "  ;  in  the  Freight  Association,  and  Joint  Traffic  Association 
cases,  agreements  among  interstate  railways  to  fix  and  maintain 
rates  and  tares  ;  in  the  Hopkins  and  Anderson  cases,  t\vo  live 


264  TRUSTS,   POOLS  AND   CORPORATIONS 

stock  exchanges  located  in  Kansas  City,  and  in  the  Addyston 
Pipe  and  Steel  Company  case,  a  combination  among  competing 
shops  located  in  different  states,  and  engaged  in  making  cast- 
iron  pipe  for  gas,  water,  and  sewer  purposes,  to  control  prices 
by  suppressing  competition  among  themselves. 

In  the  Knight  case  the  Court  held  that  the  creation  of  a 
monopoly  in  production  does  not  necessarily  and  directly  restrain 
commerce  among  the  states.  The  Court  drew  the  line  between 
production  and  interstate  commerce,  the  former  being  subject 
to  the  regulation  of  the  states,  the  latter  alone  to  that  of 
Congress. 

In  the  Freight  Association  case  the  Court  held  that  the  Anti- 
Trust  Law  applies  to  railroads,  and  that  it  prohibits  all  agree- 
ments in  restraint  of  interstate  commerce,  whether  the  restraint 
be  reasonable  or  unreasonable. 

This  was  followed  by  the  Joint  Traffic  decision,  the  Court 
holding  in  addition  that  the  Anti-Trust  Law  is  valid  and  constitu- 
tional, and  that  Congress  has  the  power  to  say  that  a  contract 
shall  not  be  lawful  which  restrains  trade  or  commerce  among 
the  several  states  by  stifling  competition. 

In  the  Hopkins  case,  it  was  held  that  the  business  of  the 
members  of  the  Kansas  City  Live  Stock  Exchange  was  not  in- 
terstate commerce  within  the  meaning  of  the  Anti-Trust  Law, 
and  therefore  the  agreement  creating  that  exchange  did  not 
operate  to  restrain  trade  or  commerce  among  the  several  states. 

In  the  Anderson  case  the  Court  took  the  view  that  whether 
the  members  of  the  Traders'  Live  Stock  Exchange  of  Kansas 
City  were  or  were  not  engaged  in  interstate  commerce,  the 
agreement  creating  the  exchange  was  not  one  in  restraint  of 
such  trade. 

In  the  Addyston  Pipe  Company  case  the  Court  held  that  Con- 
gress may  prohibit  the  performance  of  any  contract  between 
individuals  or  corporations  where  the  natural  and  direct  effect 
is  to  regulate  or  restrain  interstate  commerce,  and  that  a  combi- 
nation among  formerly  competing  shops,  which  directly  restrained 
not  simply  the  manufacture,  but  the  sale  of  a  commodity  among 
the  several  states,  comes  within  the  Anti-Trust  Law. 

Stated  in  more  detail  the  cases  are  as  follows : 


AMENDMENT   OF   SHERMAN    ANTI-TRUST   ACT      265 


UNITED  STATES  v.  E.  C.  KNIGHT  COMPANY  (Sugar  Trust) 

(60  Fed.  Rep.,  306;   Pennsylvania.) 

(60  Fed.  Rep.,  934;  circuit  court  of  appeals,  third  circuit.) 

(156  U.  S.,  i  ;  U.  S.  Supreme  Court,  March  26,  1894;  Opin., 
Fuller,  Ch.  J.  Marian,  J.,  dissenting.) 

A  bill  in  equity  to  enjoin  the  operation  of  the  so-called  "  sugar 
trust."  The  bill  was  dismissed  by  the  circuit  court, .its  decree 
affirmed  by  the  circuit  court  of  appeals,  and  its  judgment 
affirmed  by  the  Supreme  Court  of  the  United  States. 

It  appeared  in  this  case  that,  by  the  purchase  of  the  stock  of 
four  Philadelphia  refineries,  through  the  exchange  of  shares  of 
its  own  stock,  the  American  Sugar  Refining  Company  acquired 
nearly  a  complete  control  of  the  manufacture  of  refined  sugar 
in  the  United  States.  The  Government  charged  that  the  con- 
tracts under  which  these  purchases  were  made  constituted 
combinations  in  restraint  of  trade  or  commerce  in  refined  sugar 
among  the  several  states  and  with  foreign  nations  and  asked 
the  cancellation  of  the  contracts  and  the  redelivery  of  the  stock. 

The  Government's  contention  was  that  the  purpose  of  the 
purchase  was  to  acquire  a  substantial  monopoly  of  sugar  refin- 
ing, and  as  the  product  was  a  necessary  of  life,  manufactured 
for  sale  and  distribution  among  the  several  states  and  in  foreign 
countries,  that  the  effect  of  the  arrangement  was  to  restrain  and 
monopolize  interstate  and  foreign  commerce. 

But  the  Supreme  Court  held  that,  conceding  a  monopoly  was 
created,  it  was  a  monopoly  in  the  production  of  sugar  and  not 
in  its  sale  or  distribution  among  the  several  states.  If  a  monop- 
oly in  interstate  commerce  followed  a  monopoly  in  production, 
it  was  but  indirect  and  incidental  and  not  within  the  prohibition 
of  the  Anti-Trust  Law.  It  was  for  the  states  to  regulate  produc- 
tion ;  the  authority  of  Congress  was  limited  to  commerce  among 
the  states. 

Doubtless,  said  the  Chief  Justice  (page  12],  the  power  to  control 
the  manufacture  of  a  given  thing  involves  in  a  certain  sense  the  control 
of  its  disposition,  but  this  is  a  secondary  and  not  the  primary  sense  ;  and 
although  the  exercise  of  that  power  may  result  in  bringing  the  operation 


266  TRUSTS,    POOLS   AND   CORPORATIONS 

of  commerce  into  play,  it  does  not  control  it,  and  affects  it  only  inci- 
dentally and  indirectly.  Commerce  succeeds  to  manufacture,  and  is  not 
a  part  of  it. 

Again,  page  16 : 

Contracts,  combinations,  or  conspiracies  to  control  domestic  enter- 
prise in  manufacture,  agriculture,  mining,  production  in  all  its  forms,  or 
to  raise  or  lower  prices  or  wages,  might  unquestionably  tend  to  restrain 
external  as  well  as  domestic  trade,  but  the  restraint  would  be  an  indirect 
result,  however  inevitable  and  whatever  its  extent,  and  such  result  would 
not  necessarily  determine  the  object  of  the  contract,  combination,  or 
conspiracy. 

******** 

It  was  in  the  light  of  well-settled  principles  that  the  act  of  July  2 
1890,  was  framed.  Congress  did  not  attempt  thereby  to  assert  the  power 
to  deal  with  monopoly  directly  as  such  ;  or  to  limit  and  restrict  the  rights 
of  corporations  created  by  the  states  or  the  citizens  of  the  states  in  the 
acquisition,  control,  or  disposition  of  property  ;  or  to  regulate  or  prescribe 
the  price  or  prices  at  which  such  property  or  the  products  thereof  shall 
be  sold  ;  or  to  make  criminal  the  acts  of  persons  in  the  acquisition 
and  control  of  property  which  the  states  of  their  residence  or  creation 
sanctioned  or  permitted.  Aside  from  the  provisions  applicable  where 
Congress  might  exercise  municipal  power,  what  the  law  struck  at  was 
combinations,  contracts,  and  conspiracies  to  monopolize  trade  and  com- 
merce among  the  several  states  or  with  foreign  nations  ;  but  the  contracts 
and  acts  of  the  defendants  related  exclusively  to  the  acquisition  of  the 
Philadelphia  refineries  and  the  business  of  sugar  refining  in  Pennsylvania, 
and  bore  no  direct  relation  to  commerce  between  the  states  or  with 
foreign  nations. 

UNITED  STATES  i>.  TRANS-MISSOURI  FREIGHT  ASSOCIATION 

(53  Fed.  Rep.,  440  Kansas.) 

(58  Fed.  Rep.,  58;  circuit  court  of  appeals,  eighth  circuit.) 

(166  V.  S.,  290;  Supreme  Court,  March  22,  1897;  Opin., 
Peckham,  J.) 

The  contract  or  combination  assailed  in  this  case  was  an 
agreement  among  a  large  number  of  interstate  railways,  creating 
an  association  and  providing  a  method  of  fixing  rates  and  fares 
on  competitive  interstate  freight  traffic  south  and  west  of  the 


AMENDMENT   OF   SHERMAN    ANTI-TRUST   ACT      267 

Missouri  River.  The  agreement  expressly  declared  that  the 
association  \vas  formed,  among  other  things,  "  for  the  purpose 
of  mutual  protection,  by  establishing  and  maintaining  reasonable 
rates,"  etc. 

The  questions  vigorously  discussed  in  the  case  were  whether 
the  Anti-Trust  Law  applies  to  railroads,  and  whether  it  declares 
illegal  all  contracts  in  restraint  of  trade,  whether  reasonable  or 
unreasonable. 

The  Court  held  that  the  law  does  apply  to  railroads  and  that 
it  prohibits  all  contracts  in  restraint  of  trade  or  commerce  among 
the  several  states  and  with  foreign  nations,  whether  the  restraint 
be  reasonable  or  unreasonable. 

Four  of  the  justices  —  White,  Field,  Gray,  and  Shiras  —  dis- 
sented in  an  opinion  delivered  by  Mr.  Justice  White,  upon  the 
ground  that  the  restraint  of  trade  condemned  by  the  statute  is 
an  unreasonable  restraint,  such  as  was  unlawful  at  common  Jaw. 

UNITED  STATES  i>.  JOINT  TRAFFIC  ASSOCIATION 

(76  Fed.  Rep.,  895  ;  New  York.) 

(89  Fed.  Rep.,  1020;  circuit  court  of  appeals,  second  circuit.) 

(171  U.  S.,  505;  Supreme  Court,  October  24,  1898;  Opin., 
Peckham,  J.) 

The  Joint  Traffic  case  grew  out  of  an  agreement,  similar  to 
that  in  the  Trans-Missouri,  creating  an  association  to  fix  rates 
and  fares  on  competitive  interstate  traffic  east  of  Chicago. 
Nine  trunk  line  systems  —  the  Baltimore  and  Ohio,  the  Chesa- 
peake and  Ohio,  the  Erie,  the  Grand  Trunk,  the  Lackawanna, 
the  Lehigh,  the  Pennsylvania,  the  Vanderbilt,  and  the  Wabash, 
—  practically  controlling  the  business  of  railroad  transportation 
between  Chicago  and  the  Atlantic  seaboard,  were  covered  by 
the  arrangement. 

The  agreement  expressly  declared  that  it  was  entered  into 
only  to  establish  and  maintain  "  reasonable  and  just  rates,  fares," 
etc.,  and  stated  that  the  powers  conferred  upon  the  managers 
should  be  so  construed  and  exercised  as  not  to  permit  the  viola- 
tion of  the  interstate  commerce  act  or  any  other  applicable  law. 

In  addition  to  the  points  discussed  in  the  Trans-Missouri  case, 


268  TRUSTS,    POOLS   AND    CORPORATIONS 

which  counsel  for  the  railroads  attempted  to  re-argue,  it  was 
insisted  that  the  Anti-Trust  Law  is  unconstitutional. 

The  Court  followed  its  decision  in  the  Trans-Missouri  case, 
holding  that  there  was  no  substantial  difference  between  the 
Trans-Missouri  and  the  Joint  Traffic  agreements,  and,  upon  the 
constitutional  question,  held  that  Congress  has  the  power,  in 
regulating  interstate  commerce  carried  on  by  railroad  corpora- 
tions, to  say  that  no  contract  or  combination  shall  be  legal  which 
restrains  such  trade  or  commerce  by  shutting  out  the  operation 
of  the  general  law  of  competition. 

In  this  case,  as  in  the  Trans-Missouri,  the  Court  considered  it 
no  defence  that  the  rates  established  or  to  be  established  were 
reasonable.  The  fact  that  the  creation  of  the  association  pre- 
vented any  real  competition  between  the  railway  systems  involved 
was  held  to  restrain  the  trade  or  commerce  carried  on  by  them. 

The  natural,  direct,  and  immediate  effect  of  competition,  said  the 
Court  (page  577),  is,  however,  to  lower  rates,  and  to  thereby  increase 
the  demand  for  commodities,  the  supplying  of  which  increases  commerce, 
and  an  agreement,  whose  first  and  direct  effect  is  to  prevent  this  play  of 
competition,  restrains  instead  of  promoting  trade  and  commerce. 

HOPKINS  v.  UNITED  STATES 

(82  Fed.  Rep.,  529;  Kansas.) 

(84  Fed.  Rep.,  1018;  circuit  court  of  appeals,  eighth  circuit.) 

(171  U.  S.,  578;  Supreme  Court,  October  24,  1898;  Opin., 
Peckham,  J.) 

This  was  a  bill  in  equity,  filed  by  direction  of  the  Attorney- 
General,  against  Hopkins  and  other  members  of  the  Kansas 
City  Live  Stock  Exchange,  to  secure  a  dissolution  of  the  ex- 
change on  the  ground  that  its  members  were  in  a  combination 
in  restraint  of  commerce  among  the  several  states. 

It  seems  that  this  exchange  was  an  association  of  men  doing 
business  at  the  stock  yards  in  Kansas  City,  part  of  these  yards 
being  in  Missouri  and  part  in  Kansas.  The  business  of  the 
members  was  to  receive  live  stock  shipped  from  other  states, 
care  for  and  sell  the  same,  and  account  to  the  owners  for  the 
proceeds  after  deducting  charges  and  expenses.  Under  the 


AMENDMENT   OF   SHERMAN    ANTI-TRUST   ACT      269 

rules,  members  were  prohibited  from  buying  live  stock  from 
commission  merchants  in  Kansas  City  not  members  of  the 
exchange.  The  rules  also  fixed  a  commission,  prohibited  the 
employment  of  agents  to  solicit  consignments  except  upon  stipu- 
lated salary,  and  forbade  the  sending  of  prepaid  telegrams  or 
telephone  messages  with  information  as  to  the  condition  of  the 
markets. 

The  Court  held  that  the  business  conducted  by  the  members 
of  the  exchange  was  not  interstate,  but  local  in  character,  and 
therefore  decided  the  case  against  the  government. 

Page  588 : 

The  sale  or  purchase  of  live  stock  as  commission  merchants  at  Kan- 
sas City  is  the  business  done,  and  its  character  is  not  altered  because 
the  larger  proportion  of  the  purchases  and  sales  may  be  of  live  stock 
sent  into  the  state  from  other  states  or  from  the  territories.  Where  the 
stock  came  from  or  where  it  may  ultimately  go  after  a  sale  or  purchase, 
procured  through  the  services  of  one  of  the  defendants  at  the  Kansas 
City  stock  yards,  is  not  the  substantial  factor  in  the  case.  The  character 
of  the  business  of  defendants  must,  in  this  case,  be  determined  by  the 
facts  occurring  at  that  city. 

If  an  owner  of  cattle  in  Nebraska  accompanied  them  to  Kansas 
City  and  there  personally  employed  one  of  these  defendants  to  sell  the 
cattle  at  the  stock  yards  for  him  on  commission,  could  it  be  properly 
said  that  such  defendant,  in  conducting  the  sale  for  his  principal,  was 
engaged  in  interstate  commerce?  Or  that  an  agreement  between  him- 
self and  others  not  to  render  such  services  for  less  than  a  certain  sum 
was  a  contract  in  restraint  of  interstate  trade  or  commerce?  We  think 
not.  On  the  contrary,  we  regard  the  services  as  collateral  to  such  com- 
merce and  in  the  nature  of  a  local  aid  or  facility  provided  for  the  cattle 
owner  toward  the  accomplishment  of  his  purpose  to  sell  them,  and  an 
agreement  among  those  who  render  the  services  relating  to  the  terms 
upon  which  they  will  render  them  is  not  a  contract  in  restraint  of  inter- 
state trade  or  commerce. 

Page  590 : 

The  selling  of  an  article  at  its  destination,  which  has  been  sent  from 
another  state,  while  it  may  be  regarded  as  an  interstate  sale  and  one 
which  the  importer  was  entitled  to  make,  yet  the  services  of  the  indi- 
vidual employed  at  the  place  where  the  article  is  sold  are  not  so  connected 
with  the  subject  sold  as  to  make  them  a  portion  of  interstate  commerce, 


2/0  TRUSTS,    POOLS   AND   CORPORATIONS 

and  a  combination  in  regard  to  the  amount  to  be  charged  for  such  ser- 
vice is  not,  therefore,  a  combination  in  restraint  of  that  trade  or  commerce. 
Granting  that  the  cattle  themselves,  because  coming  from  another  state, 
are  articles  of  interstate  commerce,  yet  it  does  not  therefore  follow  that 
before  their  sale  all  persons  performing  services  in  any  way  connected 
with  them  are  themselves  engaged  in  that  commerce,  or  that  their  agree- 
ments among  each  other  relative  to  the  compensation  to  be  charged  for 
their  services  are  void  as  agreements  made  in  restraint  of  interstate 
trade. 

Page  592  : 

The  contract  condemned  by  the  statute  is  one  whose  direct  and  im- 
mediate effect  is  a  restraint  upon  that  kind  of  trade  or  commerce  which 
is  interstate.  Charges  for  such  facilities  as  we  have  already  mentioned 
are  not  a  restraint  upon  that  trade,  although  the  total  cost  of  marketing 
a  subject  thereof  may  be  thereby  increased.  Charges  for  facilities  fur- 
nished have  been  held  not  a  regulation  of  commerce,  even  when  made 
for  services  rendered  or  as  compensation  for  benefits  conferred. 


ANDERSON  v.  UNITED  STATES 

(82  Fed.  Rep.,  998;  Kansas;  circuit  court  of  appeals,  eighth 
circuit.) 

(171  U.  S.,  604;  Supreme  Court,  October  24,  1898;  Opin., 
Peckham,  J.) 

This  case  was  somewhat  similar  to  the  Hopkins  case,  being  a 
bill  in  equity  filed  by  direction  of  the  Attorney-General  against 
the  members  of  the  Traders'  Live  Stock  Exchange  of  Kansas 
City  to  compel  its  dissolution.  The  main  difference  between 
this  exchange  and  that  involved  in  the  Hopkins  case  was  that 
while  the  members  of  the  Traders'  Exchange  were  purchasers 
of  live  stock  on  the  market,  the  members  of  the  Live  Stock 
Exchange  were  only  commission  merchants  who  sold  the  live 
stock  upon  commission  as  a  compensation  for  their  services. 

The  rules  of  the  exchange  relied  upon  by  the  government  as 
restraining  interstate  commerce  were  those  which  forbade  the 
recognition  of  any  yard  trader  unless  he  was  a  member  of  the 
exchange,  which  required  all  the  members  of  a  partnership  to 


AMENDMENT    OF    SHERMAN    ANTI-TRUST   ACT       271 

be  members  of  the  exchange,  which  provided  that  no  member 
of  the  exchange  should  employ  any  person  to  buy  or  sell  cattle 
unless  such  person  was  a  member  of  the  exchange,  and  which 
prohibited  the  payment  of  any  fee  to  any  buyer  or  salesman  for 
buying  cattle  from  or  selling  cattle  to  such  party. 

Without  passing  upon  the  question  whether  the  members  of 
this  exchange  were  or  were  not  engaged  in  interstate  commerce, 
the  Court  held  that  the  rules  objected  to  were  of  a  character  to 
enforce  the  purpose  and  object  of  the  exchange,  and  viewed  in 
that  light  were  reasonable  and  fair.  They  could  affect  inter- 
state trade  or  commerce  in  but  a  remote  way,  and  therefore 
could  not  be  regarded  as  in  restraint  of  such  trade  or  commerce. 

The  Court  (page  615)  restated  the  rule  that  where  the  subject- 
matter  of  the  agreement  does  not  directly  relate  to  and  act  upon 
and  embrace  interstate  commerce,  and  where  the  undisputed 
facts  clearly  show  that  the  purpose  of  the  agreement  was  not 
to  regulate,  obstruct,  or  restrain  that  commerce,  but  that  it  was 
entered  into  with  the  object  of  properly  and  fairly  regulating 
the  transaction  of  the  business  in  which  the  parties  to  the  agree- 
ment were  engaged,  such  agreement  would  be  upheld  as  not 
within  the  statute. 

ADDYSTOX  PIPE  AND  STEEL  COMPANY  v.  UNITED  STATES  l 

(78  Fed.  Rep.,  712;  Tennessee.) 

(85  Fed.  Rep.,  271  ;  circuit  court  of  appeals,  sixth  circuit.) 
(175  U.  S.,  211  ;  Supreme  Court,  December  4,  1899;  Opin., 
Peckham,  J.) 

This  case  grew  out  of  a  combination  of  six  shops,  located,  one 
in  Ohio,  one  in  Kentucky,  two  in  Tennessee,  and  two  in  Ala- 
bama, which  were  engaged  in  making  cast-iron  pipe  for  gas, 
water,  and  sewer  purposes.  These  shops  controlled  the  market 
in  that  commodity  in  thirty-six  states  west  of  the  Alleghany 
mountains  and  south  of  Virginia.  They  entered  into  an  agree- 
ment to  control  prices  by  suppressing  competition  among  them- 
selves. This  was  done  by  appointing  a  representative  board  of 


272  TRUSTS,    POOLS   AND    CORPORATIONS 

one  from  each  shop,  to  which  all  inquiries  for  pipe  were  referred. 
The  board  fixed  the  price  it  thought  the  job  would  stand.  The 
job  was  then  sold  over  the  table,  the  shop  which  bid  the  highest 
bonus  for  the  benefit  of  the  pool  getting  it.  At  the  public  letting, 
the  shop  that  got  the  job  bid  the  fixed  price,  and  the  other  shops 
overbid  in  order  to  deceive  the  public. 

On  behalf  of  the  combination  it  was  contended  that  the  power 
of  Congress,  under  the  interstate-commerce  clause,  does  not  ex- 
tend to  agreements  among  private  corporations,  but  is  limited  to 
acts  of  interference  by  the  states  and  by  quasi-public  corpora- 
tions, such  as  railroads.  Private  manufacturing  corporations,  it 
was  insisted,  are  not  public  agencies  and  cannot  be  compelled 
to  keep  their  shops  running  or  sell  their  goods  to  any  person 
who  applies.  In  the  next  place,  it  was  urged  that  there  was  no 
restraint  put  upon  interstate  commerce,  and  that  under  the 
decision  in  the  Knight  case  the  creation  of  a  monopoly  in  the 
manufacture  of  a  commodity  is  not  prohibited  by  the  Anti-Trust 
Law. 

The  Supreme  Court  held,  however,  that  Congress  may  pro- 
hibit the  performance  of  any  agreement  between  individuals  or 
corporations  where  the  natural  and  direct  effect  of  it  is  to  regu- 
late or  restrain  interstate  commerce.  In  other  words,  the  Anti- 
Trust  Law  applies  to  every  agreement  in  restraint  of  interstate 
trade,  whether  made  by  corporations  or  individuals. 

In  the  next  place  the  Court  held  that  any  agreement  or  com- 
bination which  directly  restrains  not  only  the  manufacture  but 
the  sale  of  a  commodity  among  the  several  states  comes  within 
the  Anti-Trust  Law. 

Commenting  on  the  Knight  case  the  Court  said  (page  240): 

The  case  was  decided  upon  the  principle  that  a  combination  simply 
to  control  manufacture  was  not  a  violation  of  the  act  of  Congress,  be- 
cause such  a  contract  or  combination  did  not  directly  control  or  affect 
interstate  commerce,  but  that  contracts  for  the  sale  and  transportation 
to  other  states  of  specific  articles  were  proper  subjects  for  regulation 
because  they  did  form  part  of  such  commerce. 


AMENDMENT   OF   SHERMAN    ANTI-TRUST   ACT      273 

II.     QUESTIONS    WHICH    ARE    PENDING   IN    THE    COURTS 

CHAMPION  v.  AMES  AND  FRANCIS  v.  UNITED  STATES 
(SUPREME  COURT) 

(The  Lottery  Cases) 

These  cases  arose  under  the  act  of  March  2,  1895  (28  Stat., 
963),  which  makes  it  an  offence  to  cause  lottery  tickets  or  matter 
"  to  be  carried  from  one  state  to  another."  The  Francis  case  grew 
out  of  the  transit  of  a  man  carrying  a  lottery  ticket  from  New- 
port, Ky.,  to  Cincinnati,  Ohio,  across  an  interstate  bridge  ;  the 
Champion  case  from  the  carriage  by  an  express  company  over 
a  railroad,  for  hire,  of  a  box  of  lottery  tickets  from  one  state  to 
another. 

The  provision  prohibiting  the  carriage  of  lottery  tickets  from 
one  state  to  another  by  any  instrumentality  was  designed  to 
supplement  the  prohibition  of  the  carriage  of  lottery  matter 
through  the  mails,  and  thus  make  the  law  effective.  Its  con- 
stitutionality is  assailed  on  the  ground  that  while,  under  the 
power  to  establish  post-offices  and  post-roads,  Congress  may 
exclude  from  the  mails  lottery  matter,  it  has  no  authority,  under 
the  power  to  regulate  commerce  among  the  several  states,  to 
prohibit  the  carriage  of  lottery  matter  from  one  state  to  another. 

The  cases  have  been  argued  three  times,  and  are  now  under 
advisement. 

Those  assailing  the  law  insist  that  a  lottery  ticket  is  not  an 
article  of  commerce,  its  carriage  is  not  interstate  commerce, 
and  therefore  Congress  has  not  power  to  prohibit  its  carriage 
from  one  state  to  another.  It  is  further  contended  that  even 
if  such  carriage  be  commerce,  the  power  to  regulate  does  not 
include  the  power  to  prohibit. 

On  the  other  side,  the  Government  insists  that  as  lottery 
tickets  are  commonly  bought  and  sold  they  are  articles  of  com- 
merce ;  but  even  if  not,  their  carriage  from  state  to  state  is 
commerce,  inasmuch  as  transit  or  transportation  is  not  merely  a 
means  of  commerce,  but  is  commerce  itself. 

With  respect  to  the  second  point,  the  Government  con- 
tends that  the  right  to  regulate  includes  the  right  to  prohibit, 


2/4  TRUSTS,    POOLS   AND    CORPORATIONS 

where  the  character  of  the  article  warrants  its  exclusion  from 
commerce. 

The  judgment  and  opinion  of  the  Court  may  therefore  more 
clearly  define  the  nature  of  interstate  commerce  and  the  extent 
of  the  power  of  Congress  to  regulate  it. 

Since  decided,  Feb.  23,  1903,  in  favor  of  the  United  States.  188  U.  S.,  321, 
and  188  U.  S.7  375.  —  ED. 

UNITED  STATES  v.  NORTHERN  SECURITIES  COMPANY  ET  AL.1 

(United  States  circuit  court,  district  of  Minnesota.) 

(Petition  filed  March  10,  1902.) 

In  the  year  1901  the  Northern  Pacific  Railway  Company  and 
the  Great  Northern  Railway  Company  operated  two  parallel  and 
competing  transcontinental  lines  -of  railway,  extending  across 
the  northern  tier  of  states  west  of  the  Great  Lakes,  from  the 
Great  Lakes  and  the  Mississippi  River  to  the  Pacific  Ocean, 
each  system  connecting  at  its  eastern  terminals,  not  only  with 
lines  of  railway,  but  with  lake  and  river  steamers  to  other  states 
and  to  foreign  countries,  and  at  its  western  terminals  with  sea- 
going vessels  to  other  states,  territories,  and  possessions  of  the 
United  States,  and  to  foreign  countries,  and  were  then  engaged 
in  active  competition  with  one  another  in  freight  and  passenger 
traffic  among  the  several  states  and  with  foreign  countries. 

Early  in  that  year,  these  two  railway  companies,  acting  for 
the  purpose  of  promoting  their  joint  interests,  and,  as  the 
Government  claims,  in  contemplation  of  the  ultimate  placing 
of  the  Northern  Pacific  and  Great  Northern  systems  under  a 
common  source  of  control,  united  in  the  purchase  of  the  total 
capital  stock  of  the  Chicago,  Burlington,  and  Quincy  Railway 
Company,  issuing  for  that  purpose  about  8200,000,000  of  their 
joint  bonds,  at  the  rate  of  $200  in  bonds  for  each  Sioo  in  stock. 
The  Burlington  system  was  about  8000  miles  in  length,  covering 
the  vast  region  between  Chicago  and  St.  Paul  on  the  east,  and 
Kansas  City,  Denver,  Cheyenne,  and  Billings  on  the  west,  and 
was  gradually  pushing  its  rails  northwesterly  into  the  territory 

1  The  final  decision  of  March  14,  1904,  is  reprinted  in  full  at  p.  322, 
infra.  —  En. 


AMENDMENT   OF   SHERMAN    ANTI-TRUST   ACT       275 

occupied  by  the  purchasers,  and  westerly  toward  the  Pacific 
Ocean.  It  connected  with  the  Great  Northern  and  Northern 
Pacific  systems  at  St.  Paul  and  with  the  Northern  Pacific  system 
at  Billings,  Mont.,  and  was  in  part  parallel  and  competing  with 
the  Union  Pacific  system. 

Shortly  after  the  purchase  of  the  Burlington  system  the  con- 
trolling stockholders  of  the  Northern  Pacific  and  Great  Northern 
companies  organized,  under  the  laws  of  New  Jersey,  the  Northern 
Securities  Company,  with  a  capital  stock  of  $400,000,000,  for 
the  purpose  of  exchanging  its  stock  for  the  stock  of  the  two 
railway  companies,  at  the  rate  of  exchange  of  $i  15  of  the  capital 
stock  of  the  Northern  Securities  Company  for  each  share  of  the 
capital  stock  of  the  Northern  Pacific,  and  Si  So  of  the  capital 
stock  of  the  Northern  Securities  Company  for  each  share  of  the 
capital  stock  of  the  Great  Northern.  The  subscribed  capital  of 
the  Northern  Securities  was  but  330,000  and  its  authorized 
capital  of  8400,000,000  was  just  sufficient,  when  all  issued,  to 
represent  and  cover  the  exchange  value  of  the  entire  stock  of 
the  two  railway  companies,  at  the  rate  agreed  upon,  which  was 
about  $122,000,000  in  excess  of  the  combined  capital  stock  of 
the  two  railroad  companies  taken  at  par. 

The  suit  filed  by  the  Government  was  against  the  Northern 
Securities  Company,  the  two  railway  companies,  and  their  con- 
trolling stockholders,  for  the  purpose  of  dissolving  the  merger 
resulting  from  the  creation  of  a  holding  corporation  and  the 
turning  over  to  it  of  the  stock  of  the  railway  companies. 

It  is  the  contention  of  the  Government  that,  by  the  creation  of 
the  holding  corporation  and  its  taking  over  the  stock  of  the  com- 
peting railway  companies,  the  individual  stockholders  of  the 
formerly  competing  railway  companies  were  to  be  eliminated 
and  a  single  common  stockholder,  the  holding  company,  was  to 
be  substituted  ;  the  interest  of  the  individual  stockholders  in  the 
property  and  franchises  of  the  two  railway  companies  was  to  ter- 
minate, being  thus  converted  into  an  interest  in  the  property  and 
franchises  of  the  Northern  Securities  Company.  The  individual 
stockholders  of  the  Northern  Pacific  Company  were  no  longer  to 
hold  an  interest  in  the  property  or  draw  their  dividends  from  the 
earnings  of  the  Northern  Pacific  system,  and  the  individual  stock- 


276  TRUSTS,   POOLS  AND   CORPORATIONS 

holders  of  the  Great  Northern  were  no  longer  to  hold  an  interest 
in  the  property  or  draw  their  dividends  from  the  earnings  of  the 
Great  Northern  system,  but  having  ceased  to  be  stockholders  in 
the  railway  companies  and  having  become  stockholders  in  the 
holding  corporation,  both  were  to  draw  their  dividends  from  the 
earnings  of  both  systems,  collected  and  distributed  by  the  hold- 
ing corporation.  In  this  manner,  by  making  the  stockholders 
of  each  system  jointly  interested  in  both  systems,  and  by  practi- 
cally pooling  the  earnings  of  both  systems  for  the  benefit  of  the 
former  stockholders  of  each,  and  by  vesting  the  selection  of 
the  directors  and  officers  of  each  system  in  a  common  body,  to 
wit,  the  holding  corporation,  with  not  only  the  power  but  the 
duty  to  pursue  a  policy  which  wrould  promote  the  interests,  not 
of  one  system  at  the  expense  of  the  other,  but  of  both  at  the 
expense  of  the  public,  all  inducement  for  competition  between 
the  two  systems  was  to  be  removed,  a  virtual  consolidation 
effected,  and  a  monopoly  of  the  interstate  and  foreign  commerce 
formerly  carried  on  by  the  two  systems  as  independent  competi- 
tors established. 

It  is  further  contended  that  the  Northern  Securities  Company 
was  not  organized  in  good  faith  to  purchase  and  pay  for  the 
stocks  of  the  Great  Northern  and  the  Northern  Pacific  Railway 
companies.  It  was  organized  solely  to  incorporate  the  pooling 
of  the  stocks  of  said  companies.  It  is  a  mere  depositary,  custo- 
dian, holder,  and  trustee  of  the  stocks  of  the  Great  Northern 
and  the  Northern  Pacific  Railway  companies,  and  its  shares  of 
stock  are  virtually  but  beneficial  certificates  issued  against  such 
railroad  stocks  to  designate  the  interest  of  the  holders  in  the 
pool. 

At  the  time  of  the  passage  of  the  act  of  July  2,  1890,  the 
method  used  to  combine  competing  companies  was  by  placing 
their  stocks  in  the  hands  of  trustees  and  issuing  trust  certificates 
in  exchange  therefor.  The  interesting  question  in  this  case  is 
whether  substantially  the  same  result  can  be  reached  by  creating 
a  holding  corporation  to  take  over  the  stock  of  companies  com- 
peting in  interstate  commerce,  and  thus  pool  their  earnings, 
consolidate  their  control,  and  remove  all  inducement  for  effec- 
tive competition  between  them. 


AMENDMENT   OF   SHERMAN    ANTI-TRUST   ACT      277 


UNITED    STATES  v.  SWIFT   &    Co.   ET  AL.  (THE    BEEF   TRUST 

CASE) 

(United  States  circuit  court,  northern  district  of  Illinois.) 

(Petition  filed  May  10,  1902.) 

This  is  a  bill  of  complaint,  brought  by  the  direction  of  the 
Attorney-General,  against  seven  corporations,  one  partnership 
and  twenty-three  persons,  constituting  what  is  commonly  called 
"The  Beef  Trust,"  engaged  in  the  business  of  purchasing  live 
stock,  converting  the  same  into  fresh  and  cured  meats,  and  sell- 
ing the  products  to  dealers  and  consumers  throughout  the  United 
States  and  in  foreign  countries.  The  bill  charges  the  defendants 
with  being  engaged  in  a  combination  or  conspiracy  to  restrain 
trade  or  commerce  in  the  articles  mentioned  among  the  several 
states  and  with  foreign  countries,  and  to  monopolize  or  attempt 
to  monopolize,  the  same  by  a  number  of  different  methods  which 
are  set  out  in  detail  in  the  bill,  to  wit,  by  requiring  their  agents 
to  refrain  from  bidding  against  each  other  in  the  purchase  of  live 
stock  ;  by  collusively  bidding  up  the  market  price  for  a  time  in 
order  to  attract  shipments  of  live  stock  to  the  yards  and  then 
refraining  from  bidding  ;  by  arbitrarily  fixing  uniform  prices  on 
interstate  sales  of  meat,  either  directly  or  through  their  agents, 
and  by  lowering  or  raising  such  prices  ;  by  curtailing  the  quan- 
tity of  meats  shipped  from  one  state  to  another;  by  fixing  uni- 
form terms  of  credit  to  dealers  and  uniform  charges  for  cartage, 
for  the  purpose  of  preventing  competition  in  the  interstate  sales 
of  meat ;  and  by  combining  to  secure  rebates  on  interstate  ship- 
ments of  meat  products  from  the  railway  companies. 

A  demurrer,  general  and  special,  was  filed  by  the  defendants, 
which  was  argued  on  December  1 6,  1902,  and  is  now  under 
advisement  by  the  court.  The  contention  of  the  defendants  is, 
that  although  the  live  stock  may  have  been  purchased  in  states 
other  than  where  converted  into  fresh  meats,  and  the  fresh 
meats  sold  in  states  other  than  where  prepared,  nevertheless 
the  shipments  between  these  states  were  in  no  wise  affected  by 
the  arrangement  complained  of,  which  only  touched  the  live 
stock  at  the  point  of  purchase  and  the  meats  at  the  point  of  sale, 


278  TRUSTS,   POOLS  AND   CORPORATIONS 

both  local.     Therefore  they  insist  that  no  restraint  of  interstate 
commerce  is  shown. 

Since  decided  April  18,  1903,  in  favor  of  the  Government,  holding  that 
such  a  combination  is  in  effect  in  restraint  of  trade.  122  Fed.  Rep.,  529. 
The  case  now  awaits  argument  in  the  Supreme  Court. —  ED. 

UNITED    STATES    v.   RAILROADS   (THE    RAILROAD    INJUNCTION 

SUITS) 

These  are  bills  in  equity,  filed  by  direction  of  the  Attorney- 
General,  against  fourteen  railroad  companies,  eight  pending  in 
the  United  States  circuit  court  for  the  western  district  of  Mis- 
souri, and  six  in  the  United  States  circuit  court  for  the  northern 
district  of  Illinois. 

The  bills  allege  that  the  railroad  companies  (acting  separately) 
combined  with  certain  favored  shippers  to  grant  the  latter  unlaw- 
ful rebates  or  concessions  from  their  published  tariffs  in  rates  on 
grain,  carried  from  one  state  to  another,  notwithstanding  they 
maintained  their  published  rates  as  against  all  other  grain  deal- 
ers and  the  general  public. 

It  appeared,  from  the  investigation  made,  that  on  each  of  the 
principal  grain-carrying  railroads  a  different  shipper  enjoyed 
this  preference.  The  discrimination  was  so  great  that  the  grain 
dealer  denied  the  preference  could  not  long  continue  in  the  busi- 
ness in  competition  with  the  favored  one.  The  effect  of  the 
preference  was  to  force  those  who  conformed  to  the  law  out  of 
the  grain  business,  leaving  the  favored  dealers  to  enjoy  a  practi- 
cal monopoly  of  the  purchase  and  shipment  of  grain  on  the 
railroads  preferring  them. 

As  the  Federal  courts  have  held  that,  under  the  interstate- 
commerce  law,  a  corporation  is  not  indictable,  only  its  officers 
being  answerable  for  violations,  and  that  unjust  discrimination 
does  not  exist  where  no  other  shipper  pays  the  published  rate 
at  the  same  time  the  preferred  shipper  receives  the  concession, 
it  will  be  observed  that  the  penal  provisions  of  the  interstate- 
commerce  act  afford  no  practical  remedy.  Even  if  the  act 
should  be  amended  so  as  to  make  the  corporation  criminally 
liable,  no  adequate  relief  would  be  afforded  to  those  who  wish 


AMENDMENT   OF   SHERMAN    ANTI-TRUST   ACT      279 

to  engage  in  the  grain  business.  To  open  the  business  to  them, 
it  is  necessary  to  prevent  the  railroads  from  granting  preferences 
in  transportation  rates  or  facilities. 

This  being  the  situation,  the  bills  in  equity  were  filed,  in 
which,  after  reciting  the  facts,  it  is  claimed  that  not  only  were 
the  acts  complained  of  in  violation  of  the  interstate-commerce 
act,  but  also  were  in  restraint  of  trade  or  commerce  among  the 
several  states,  and  constituted  an  attempt  to  monopolize  such 
commerce  in  the  grain  business,  in  violation  of  the  act  of  July  2, 
1890. 

Temporary  injunctions  were  passed  upon  by  Judge  Grosscup  in  April,  1903, 
122  Fed.  Rep.,  544.  The  Elkins  amendment  to  the  act  to  regulate  commerce 
had  meanwhile  been  enacted.  The  right  of  the  Government  to  maintain  a  suit 
in  equity  was  recognized.  —  ED. 

The  railroad  companies  demurred  to  the  bills,  contending: 

1.  That  the  remedies  provided  in  the  act  to  regulate  commerce 
are  exclusive,  and  do  not  include  a  remedy  by  injunction  at  the 
suit  of  the  Government. 

2.  That  under  the  general  jurisdiction  in  equity,  injunction 
does  not  lie  to  restrain  the  violation  of  a  law,  even  if  the  public 
is  being  injured  by  such  violation. 

3.  That  a  combination  between   a  railroad   company  and   a 
shipper  to  grant  the  latter  an  unlawful  rebate,  which  results  in 
establishing  a  monopoly,  is  not  covered  or  condemned  by  the 
provisions  of  the  act  of  July  2,  1890;  and  therefore  the  remedy 
by  injunction  will  not  lie  under  the  law. 

The  demurrers  were  argued  December  15,  1902,  before  the 
judges  (sitting  together)  of  the  two  circuit  courts,  and  are  now 
held  under  advisement. 

MONTAGUE  &  COMPANY  ?'.  LOWKY 

(Krror  to  the  circuit  court  of  appeals  for  the  ninth  circuit.) 

(19^  U.S.  Rep.,  38.      Decided  February  23.  1904.) 

An  association  was  formed  in  California  by  manufacturers  of  and  dealers 
in  tiles,  mantels  and  grates:  the  dealers  agreed  not  to  purchase  materials  trom 
manufacturers  uho  were  not  members,  and  not  to  sell  unset  tiles  for  less  than 
list  prices,  which  were  fiftv  per  cent  higher  than  to  members.  Manufacturers, 


280  TRUSTS,   POOLS  AND   CORPORATIONS 

resident  in  other  states  than  California,  agreed  not  to  sell  to  any  other  than 
members.  Membership  was  prescribed  by  rules,  such  as  carrying  $3000  worth 
of  stock.  A  firm  of  outside  dealers  who  were  not  members,  and  who  did  not 
carry  $3000  worth  of  stock,  brought  action  under  §  7  of  the  Anti-Trust  Act  of 
1890.  It  was  held,  that  although  sales  within  the  state  were  but  a  small  part 
of  the  total  transactions  involved,  the  general  effect  of  the  scheme  was  to 
enhance  prices ;  and  that  it  was  impossible  to  separate  intra-state  from  inter- 
state business ;  and  that  a  combination  in  restraint  of  trade  had  been  shown. 
The  parties  aggrieved  were  entitled  to  recover  threefold  damages  as  found  by 
the  jury.  —  ED. 


III.     SUGGESTIONS   RESPECTING   LEGISLATION 

I  come  now  to  your  invitation  to  communicate  to  the  com- 
mittee "  any  suggestions  that  your  reflection  or  experience  shall 
suggest  as  to  what  may  be  desirable  in  the  way  of  further 
legislation." 

In  view  of  the  wide  experience  of  the  committee  in  dealing 
legislatively  with  legal  and  economic  questions,  I  venture  upon 
the  line  of  suggestion  with  much  hesitation  and  feeling  that  the 
utmost  the  committee  desires  in  this  respect  is  that  some  con- 
crete thing  be  set  down  that  may  be  considered,  in  connection 
with  other  views  that  may  be  presented,  as  to  what  might  be 
done  within  the  short  period  allowed  for  consideration  during 
the  life  of  this  present  Congress. 

I  think  it  proper  enough  to  briefly  premise  such  suggestions 
as  I  shall  make  for  immediate  action  by  a  statement  of  some  of 
the  reasons  upon  which  they  are  based. 

The  end  desired  by  the  overwhelming  majority  of  the  people 
of  all  sections  of  the  country  is  that  combinations  of  capital 
should  be  regulated  and  not  destroyed,  and  that  measures  should 
be  taken  to  correct  the  tendency  toward  monopolization  of  the 
industrial  business  of  the  country.  I  assume  a  thing  to  be 
avoided,  even  by  suggestion,  is  legislation  regulating  the  busi- 
ness interests  of  the  country  beyond  such  as  will  accomplish 
this  end. 

In  my  judgment,  a  monopoly  in  any  industry  would  be  im- 
possible in  this  country,  where  money  is  abundant  and  cheap 
and  in  the  hands  or  within  the  reach  of  keen  and  capable  men, 


AMENDMENT   OF    SHERMAN    ANTI-TRUST   ACT      281 

if  competition  were  assured  of  a  fair  and  open  field  and  protected 
against  unfair,  artificial,  and  discriminating  practices. 

Two  or  more  persons  or  corporations  cannot  by  any  com- 
bination or  arrangement  between  themselves  either  contract  or 
expand  the  rights  of  others  to  engage  in  a  similar  business. 
The  utmost  they  can  do  is  to  discourage  the  disposition  to  do 
so  by  restricting  the  opportunities,  or  by  securing  to  themselves 
some  exclusive  facilities  or  the  enjoyment  of  some  common 
facilities  upon  exclusive  terms. 

If  the  law  will  guarantee  to  the  small  producer  protection 
against  piratical  methods  in  competition  and  keep  the  highways 
to  the  markets  open  and  available  to  him  for  the  same  tolls 
charged  to  his  powerful  competitor,  he  will  manage  to  live  and 
thrive  to  an  astonishing  degree. 

Individualism  in  production  has  its  advantages  as  well  as  com- 
bination. Small  individual  enterprises  not  uncommonly  spring 
up  and  thrive  within  the  shadow  of  the  larger  ones,  though 
enjoying  none  of  their  supposed  advantages  of  control  of  sources 
of  raw  material,  fuel,  and  transportation  facilities,  yet  realizing 
large  profit  per  ton  of  output  because  of  the  closer  economies 
possible  through  direct,  personal,  interested  management.  In- 
deed, it  is  true  that  the  great  concerns  whose  stocks  have  been 
gathered  in  by  the  holding  companies  (the  real  trusts)  are  them- 
selves largely  but  aggregations  of  successful  smaller  ones  which, 
one  by  one,  have  made  their  competition  so  severely  felt  by  an 
ambitious  rival  that  he  has  absorbed  them. 

I  believe  the  rebates  and  kindred  advantages  granted  by  car- 
riers to  large  operators'in  the  leading  industries  of  the  country, 
as  against  their  competitors,  in  many  years  amounted  to  a  sum 
that  would  represent  fair  interest  upon  the  actual  money  invested 
in  the  business  of  such  operators. 

If  substantially  all  of  a  given  business  is  controlled  by  one 
company,  the  more  threatening  to  potential  competition  does 
this  iniquity  become,  and  with  greater  timidity  does  such  compe- 
tition approach  the  field. 

In  some  respects  the  holding  company  is  weaker  than  its 
independent  rivals.  It  pays  as  much,  if  not  more,  for  labor. 
Advantage  in  the  saving  of  an  intermediate  profit  upon  raw 


282  TRUSTS,   POOLS  AND   CORPORATIONS 

material  and  fuel  is  largely  offset  by  the  enormous  cost  of  the 
sources  of  supply  represented  in  high  capitalization. 

This  capitalization,  in  almost  every  case  of  a  holding  com- 
pany, represents  far  more  than  the  aggregate  intrinsic  value  of 
its  constituent  companies.  The  method  of  computing  values 
for  purpose  of  concentration  has  invariably  been  upon  earning 
power,  and  rebates  have  frequently  swelled  earnings  so  that 
enormous  volumes  of  capital  stock  represent  nothing  but  unfair 
advantage  obtained  over  rivals. 

The  situation  is  much  improved  in  respect  to  transportation 
discriminations  within  the  last  two  years.  This  is  the  result, 
first,  of  a  determined  effort  upon  the  part  of  the  Government  to 
apply  existing  laws  in  an  effective  way  against  discrimination  ; 
and  second,  to  the  fact  that  some  of  the  higher-minded  railroad 
managers  of  the  country  have  exerted  their  large  influence  in 
the  direction  of  equitable  dealing  with  the  shippers  of  the  terri- 
tory which  they  serve.  Whether  it  is  a  consequence  of  these 
influences  or  a  mere  coincidence,  it  is  nevertheless  stated  on 
high  authority  to  be  a  fact  that  the  embarkation  of  new  capital 
in-  enterprises  in  competition  with  the  supposedly  controlled 
industries  within  the  period  named  probably  equals  the  capital 
of  the  trusts.  The  effect  of  certainty  of  protection  against 
predatory  competition  can  be  safely  prophesied  to  increase  this 
figure. 

The  country  is  filled  with  men  whose  lives  have  been  devoted 
to  industry,  who  have  developed  and  made  profitable  the  prop- 
erties now  possessed  by  the  trusts  at  prices  far  in  excess  of 
the  cost  of  modernized  duplicates,  who  will  not  long  remain  idle 
when  assured  that  their  capital  and  experience  can  be  securely 
employed  in  the  business  to  which  they  were  trained. 

Too  much  has  been  conceded  in  public  discussion  to  the  trusts 
in  this  respect.  Organizations  in  one  state  to  control  production 
in  other  states  of  commodities  consumed  in  all  the  states  are  as 
a  rule  devices  of  shrewd  men  to  capitalize  for  their  own  benefit 
the  country's  prosperity.  They  are  begotten  in  prosperous 
times.  Poor  times  offer  no  inducements.  They  are  essentially 
different  from  the  combinations  effected  by  producers,  of  their 
own  motion,  for  economic  reasons.  Those  which  have  been 


AMENDMENT   OF   SHERMAN   ANTI-TRUST   ACT      283 

recklessly  conceived  contain  within  themselves  the  germ  of  their 
own  undoing.  They  have,  as  a  rule,  only  acquired  the  owner- 
ship of  the  stocks  of  the  industries  of  the  country  which  had 
already  attained  their  gigantic  stature.  Their  existence  does 
not  increase  the  productive  capacity  of  the  country,  except  as 
high  prices  of  products  have  stimulated  competition,  nor  have 
they  because  of  their  existence  increased  demand,  as  the  demand 
for  products  has  never  been  thought  to  depend  upon  the  title  to 
capital  stocks  of  producing  companies. 

My  suggestion,  therefore,  is  that  as  a  first  step  in  a  policy  to 
be  persistently  pursued  until  every  industry,  large  and  small,  in 
the  country  can  be  assured  of  equal  rights  and  opportunities, 
and  until  the  tendency  to  monopolization  of  the  important  indus- 
tries of  the  country  is  checked,  that  all  discriminatory  practices 
affecting  interstate  trade  be  made  offences  to  be  enjoined  and 
punished.  Such  legislation  to  be  directed  alike  against  those 
who  give  and  those  who  receive  the  advantages  thereof  and  to 
cover  discrimination  in  prices  as  against  competitors  in  partic- 
ular localities  resorted  to  for  the  purpose  of  destroying  competi- 
tion in  interstate  and  foreign  trade,  as  well  as  discrimination  by 
carriers. 

Such  practices  are  so  obviously  unreasonable  that  to  inhibit 
them  would  be  a  measure  of  regulation  of  commerce  to  keep 
it  free  and  unrestrained  and  not  an  attempt  to  exercise  arbitrary 
power.  Such  legislation,  to  certainly  reach  producers  guilty  of 
practices  injurious  to  national  and  international  commerce, 
should,  in  my  judgment,  take  the  form  of  penalizing  the  trans- 
portation of  the  goods  produced  by  the  guilty  parties,  and  the 
Federal  courts  should  be  given  power  to  restrain  such  transpor- 
tation at  the  suit  of  the  Government. 

It  may  be  said  that  under  the  "act  to  regulate  commerce,"  a 
shipper  may  be  punished  for  receiving  rebates  or  special  rates 
less  than  the  lawful  published  rates;  and  that  it  is  unnecessary 
to  provide  additional  legislation  in  this  respect  to  curb  trusts, 
monopolies,  and  combinations.  This,  however,  is  an  erroneous 
statement. 

Whatever  the  Congress  may  have  designed  in  the  act  to  regu- 
late commerce  regarding  the  punishment  of  shippers  for  partici- 


284  TRUSTS,   POOLS  AND   CORPORATIONS 

pation  in  violation  of  that  act,  as  construed  by  the  courts,  their 
punishable  offences  fall  under  two  heads : 

First.  Where  the  shipper  has  solicited  or  participated  in 
instances  of  unjust  discrimination,  and 

Second.  In  cases  of  fraud  perpetrated  by  him  against  the  car- 
rier, ex.  gr.,  by  false  representation  of  the  contents  of  a  package. 

As  to  the  first,  the  courts  have  held  that  to  constitute  unjust 
discrimination  it  is  necessary  to  prove  that  at  the  time  the  lower 
unlawful  rate  was  being  granted  to  the  favored  shipper,  the 
higher  lawful  rate  was  imposed  against  another  shipper  on  like 
commodities  between  the  same  points. 

In  many  cases  of  departure  by  a  carrier  from  its  published 
tariffs,  the  favored  shipper  has  enjoyed  his  advantage  for  so 
long  a  time  that  all  rivals  have  disappeared.  In  such  cases,  and 
they  are  the  most  numerous,  no  illegal  discrimination  exists ; 
consequently  the  recipient  of  the  unlawful  rebates  escapes  the 
penalties  of  the  act  to  regulate  commerce. 

The  act  prohibits  the  carrier  from  charging  any  one  a  greater 
or  less  rate  than  the  rates  named  in  its  schedules ;  but  the  pen- 
alties provided  therefor  have  been  held  by  the  courts  not  to  be 
applicable  to  any  carrier  that  is  an  incorporated  company. 

The  officers  or  agents  of  such  incorporated  company,  who 
grant  the  rebate  or  make  the  unlawful  concession  in  rates,  are 
subject  to  indictment  and  punishment.  That,  however,  is  gen- 
erally an  impracticable  remedy,  because  the  agent  who  makes 
the  concession  is  usually  the  only  person  by  whom  it  can  be 
ascertained  that  the  rebate  has  been  paid ;  and  when  he  has 
testified  in  relation  to  the  matter  he  has  thereby  obtained 
amnesty  from  prosecution. 

Even  if  the  corporation  and  its  officers  could  be  effectively 
reached  by  criminal  proceedings,  the  law  leaves  unrestrained 
the  persons,  corporations,  and  combinations  who  are  beneficiaries 
of  the  unlawful  rebates. 

This  casns  omissns  of  the  act  to  regulate  commerce  should  be 
supplied  by  imposing  a  penalty  upon  the  incorporated  carrier 
and  beneficiary  alike,  and  the  right  of  courts  to  restrain  such 
practices  at  the  suit  of  the  United  States,  a  right  not  settled  and 
now  vigorously  challenged,  should  be  made  certain. 


AMENDMENT   OF   SHERMAN    ANTI-TRUST   ACT      285 

I  think  the  operation  of  such  an  act  should  be  limited  to  the 
transportation  by  common  carriers  subject  to  the  act  to  regulate 
commerce.  This  is  necessary  for  the  reason  that  there  is  no 
requirement  of  law  that  rates  shall  be  published  by  common 
carriers,  except  by  railroad,  or  railroad  and  water,  carriers  acting 
as  one  line.  When  the  act  to  regulate  commerce  was  under 
consideration  it  was  deemed  impracticable  if  not  unwise  to  at- 
tempt to  regulate  the  rates  of  water  or  other  common  carriers. 
It  was  understood  that  in  the  nature  of  things  water  rates  could 
not  be  stable. 

In  addition  to  that  it  was  believed  that  water  competition 
must  be  unrestricted.  As  it  is  the  least  expensive  means  of 
transportation,  it,  wherever  it  could  directly  or  indirectly  com- 
pete with  carriers  by  rail,  would,  approximately,  furnish  a  basis 
for  rates  by  railroad,  and  measurably  keep  such  rates  within 
the  limits  of  extortion. 

So  that  if  provision  is  made  by  law  to  prevent  rebates,  a 
standard  or  established  schedule  must  be  referred  to;  and  as 
the  admitted  abuse  of  magnitude  has  been  in  the  favors  granted 
by  railroad  companies,  their  rates,  which  the  law  requires  shall 
be  made  public,  should  be  taken  as  the  rates  which  must  be 
adhered  to  and  made  equal  to  all  the  people  under  similar 
conditions. 

It  should,  therefore,  be  made  unlawful  to  transport  traffic  by 
carriers  subject  to  the  "act  to  regulate  commerce"  at  any  rate 
less  than  such  carriers'  published  rate,  and  all  who  participate 
in  the  violation  of  such  law  should  be  punished. 

An  additional  provision  should  be  made  to  reach  corporations, 
combinations,  and  associations  which  produce  and  manufacture 
wholly  within  a  state,  but  whose  products  or  sales  enter  into 
interstate  commerce.  It  should  relate,  first,  to  such  concerns  as 
fatten  on  rebates  in  transportation,  and,  second,  to  concerns 
which  sell  below  the  general  price  of  a  commodity  in  particular 
localities,  or  otherwise  in  particular  localities  wantonly  seek  to 
destroy  competition.  These  could  be  excluded  with  their  com- 
modities, products,  or  manufactures  from  crossing  state  lines. 

As  the  power  of  Congress  over  interstate  commerce  is  plenary, 
excepting  as  it  may  be  limited  by  the  Constitution,  it  is  believed 


286  TRUSTS,   POOLS  AND   CORPORATIONS 

that  it  may  impose  such  a  punishment  for  the  violation  of  the 
public  policy  of  the  nation. 

A  comprehensive  plan  should  be  framed  to  enable  the  Gov- 
ernment to  get  at  all  the  facts  bearing  upon  the  organization 
and  practices  of  concerns  engaged  in  interstate  and  foreign  com- 
merce essential  to  a  full  understanding  thereof  and  to  compel 
the  observance  of  the  law.  This  should  be  framed  upon  tested 
lines. 

A  commission  should  be  created  to  aid  in  carrying  out  the 
provisions  of  the  act  of  July  2,  1890,  and  any  further  legislation 
relating  to  commerce.  It  should  be  the  duty  of  such  commis- 
sion, among  other  things,  to  make  diligent  investigation  into  the 
operations  and  conduct  of  all  corporations,  combinations,  and 
concerns  engaged  in  interstate  or  foreign  commerce,  and  to 
gather  such  information  and  data  as  would  enable  it  to  make 
specific  recommendations  for  additional  legislation  for  the  regu- 
lation of  commerce,  and  annually,  and  oftener  if  it  shall  seem 
needful,  to  make  report  thereon  to  the  President. 

Such  a  commission  should  have  authority  to  inquire  into  the 
management  of  the  business  of  such  corporations  and  concerns, 
to  keep  itself  informed  as  to  the  manner  and  method  in  which 
the  same  is  conducted,  and  to  obtain  from  such  concerns  full 
and  complete  information  necessary  to  enable  the  commission 
to  perform  the  duties  and  carry  out  the  objects  for  which  it  is 
created  ;  it  should  have  the  power,  when  in  its  judgment  it 
is  necessary,  to  require  reports  from  them  and  to  require  from 
them  and  their  officers,  agents,  and  employees  specific  answers 
to  all  questions  upon  which  the  commission  needs  information. 
As  there  are  no  means  now  provided  by  law  for  compelling 
testimony,  such  a  law  should  provide  that  no  person  should  be 
excused  from  attending  and  testifying  or  from  producing  books, 
papers,  contracts,  and  documents  before  such  commission  or 
the  courts. 

Of  course,  the  general  scheme  of  legislation  to  correct  trust 
abuses  should  be  developed  with  great  care,  for  it  is  not  nearly 
so  important  to  act  quickly  as  to  act  wisely.  Primarily,  the 
question  of  the  power  of  Congress  to  reach  what  the  Sherman 
Act  seems  to  have  missed  should  be  authoritatively  determined, 


AMENDMENT   OF   SHERMAN    ANTI-TRUST   ACT       287 

as  upon  that  proposition  the  whole  structure  of  effective  regula- 
tive legislation  must  rest.  We  should  at  once  take  the  first  steps 
by  a  law  aimed  at  what  we  certainly  know  to  be  unreasonable 
practices  directly  restrictive  of  freedom  of  commerce  upon 
which  the  fundamental  question  can  be  raised,  and  by  a  law 
conferring  upon  the  Government  a  general  supervisory  power 
as  above  outlined. 

Another  step  in  legislation  which  I  earnestly  recommend,  and 
which  will,  if  enacted,  greatly  hasten  a  solution  of  the  problem, 
is  that  an  act  be  passed  as  soon  as  possible  to  speed  the  final 
decision  of  cases  now  pending  and  others  that  may  be  raised  under 
the  Anti-Trust  Law.  I  refer  to  an  act  to  enable  the  Attorney- 
General  to  secure  the  original  hearing  by  a  full  bench  of  the  cir- 
cuit judges  in  the  circuit  wherein  is  pending  any  suit  brought  by 
the  United  States  under  the  Anti-Trust  Law  which  the  Attorney- 
General  certifies  to  the  court  to  involve  questions  of  great  public 
importance,  and  giving  an  appeal  from  their  decision  directly  to 
the  Supreme  Court  of  the  United  States  in  such  cases,  and  also 
giving  an  appeal  directly  to  the  Supreme  Court  in  all  pending 
cases  in  which  the  United  States  is  a  party  which  have  been 
heard  and  are  as  yet  unappealed. 

There  are  a  number  of  cases  now  provided  by  statute  where 
appeals  may  be  made  directly  to  the  Supreme  Court  from  the 
district  and  circuit  courts,  namely,  in  cases  in  which  the  jurisdic- 
tion of  the  court  is  in  issue,  from  final  sentences  and  decrees  in 
prize  cases,  in  cases  of  conviction  of  a  capital  or  otherwise  infa- 
mous crime,  in  cases  that  involve  the  construction  or  application 
of  the  Constitution  of  the  LTnited  States,  in  cases  in  which  the 
constitutionality  of  any  law  of  the  United  States,  or  the  validity 
or  construction  of  any  treaty  is  drawn  in  question,  and  in  cases 
in  which  the  constitution  or  law  of  a  state  is  claimed  to  be  in 
contravention  of  the  Constitution  of  the  United  States. 

The  class  of  cases  that  I  suggest  should  be  brought  within 
this  rule,  it  seems  to  me,  is  of  as  great  importance  as  any  of 
those  referred  to.  The  suggested  provision  requiring  a  full 
bench  of  the  circuit  judges  would  insure  the  cases  receiving  as 
full  consideration  before  presentation  to  the  Supreme  Court  as  if 
heard  by  the  United  States  circuit  court  of  appeals. 


288  TRUSTS,    POOLS  AND   CORPORATIONS 

It  is  too  much  to  say  that  with  these  gaps  closed  the  scheme 
of  governmental  regulation  will  be  complete;  but  it  is  clear  that 
without  some  similar  legislation  it  would  continue  to  be  inade- 
quate. And  such  legislation  will  make  a  long,  first  stride  in 
advance. 

Very  respectfully  yours, 

P.  C.  KNOX, 

A  ttorney-  General. 


XIII 

THE   TIN-PLATE   INDUSTRY1 
I 

BY  tin-plate  is  meant  a  sheet  of  iron  or  steel  varying  in  thick- 
ness from  22  to  30  wire  gauge  coated  with  tin.  In  the 
language  of  the  trade,  plates  before  they  are  covered  with  tin 
are  referred  to  as  "  black  plates."  These  plates  are  made  in 
several  sizes,  but  the  standard  is  a  plate  14x20  inches  and  when 
coated  with  tin  is  placed  in  a  box  containing  225  sheets.2  These 
boxes  weigh  108  Ibs.  Besides  the  regular  commercial  tin-plate 
is  another  commodity  made  by  the  mills  which  is  called  "terne 
plate."  A  terne  plate  is  an  iron  or  steel  sheet  covered  with  an 
alloy  of  lead  and  tin,  generally  two-thirds  lead  and  one-third  tin. 
The  terne  plate  is  used  very  largely  for  roofing  and  cornice  pur- 
poses. 

The  method  of  manufacturing  tin  and  terne  plates  is  rather 
simple  so  far  as  the  process  is  concerned,  but  a  great  deal  of 
skill  is  required  to  turn  out  good  plates.  The  process  begins 
with  the  rolling  of  thin  sheets  from  billets  of  steel  especially 
prepared  for  the  industry.  When  the  required  thickness  has 
been  reached  the  plates  are  sheared  to  a  size  and  made  ready 
for  pickling,  A  plate  is  pickled  when  placed  in  a  bath  of  sul- 
phuric acid  and  water.  This  process  clears  the  sheets  of  scales. 
When  taken  out  of  the  pickling  bath  the  plates  are  rinsed  free 
of  the  acid  and  packed  in  pans  with  layers  of  sawdust  between 
the  plates.  The  pans  are  then  carefully  sealed  and  put  in  an 

annealinjr  furnace,  where  they  are  allowed  to  remain   for  ten 

~  j 

hours.     The  heat  of  the  furnace  is  gradually  reduced  and  the 
plates  allowed  to  cool  slowly.      A   second   rolling  is   now  neces- 

1  I-'nmi  the    Yiiit'  AVrvVri',  November,  iS<)S,  and  August.  lS')<). 

-Called  liv  thi-  trade  1C,  14x20,  and  weighing  50  UK.  or  less  per  TOO  sq.  ft. 
Other  grades  are  IX,  weighing  between  50  and  U2\  Ibs.  ;  and  L\X,  weighing  63  Ibs. 
per  luu  S'|.  ft, 

289 


290  TRUSTS,   POOLS  AND   CORPORATIONS 

sary.  This  is  done  by  passing  them  through  three  sets  of  cold 
steel  rollers.  Another  sulphuric  acid  bath  and  annealing  are 
undertaken  and  the  plates  are  ready  for  tinning.  In  the  tinning 
department  the  plates  are  first  coated  with  grease,  then, dipped 
into  the  tinning  pot,  taken  out  and  placed  in  a  bath  of  molten 
tin.  The  plates  are  brushed,  again  greased  and  passed  through 
melted  tin  for  a  third  time.  The  plates  are  now  allowed  to  cool, 
carefully  wiped  free  of  grease,  assorted  and  packed  in  boxes  ac- 
cording to  quality.  This  is  the  process  of  tin-plate  manufacture.1 
The  tin  used  in  the  process  comes  from  several  sources.  The 
best  of  these  is  found  in  Australia  and  the  Straits  Settlements. 
The  latter  furnish  the  most  desirable  tin,  known  as  Banca  tin. 
This  is  regarded  as  the  purest,  and  is  in  consequence  more 
sought  after  by  the  manufacturers  of  tin-plate.  The  Cornwall 
mines  were  discovered  about  55  B.C.  and  for  twelve  centuries 
were  the  one  source  of  this  mineral.  In  1240  tin  was  found  in 
Bohemia.  Five  hundred  years  later,  in  1760,  the  Banca  mines 
were  opened.  In  the  following  century  Australia  became  a  pro- 
ducer of  block  tin  on  a  large  scale.  From  1872  tin  has  been 
found  in  commercial  quantities  in  New  South  Wales,  Queensland, 
and  Tasmania.  The  United  States  have  not  been  so  fortunate, 
although  many  attempts  have  been  made  from  time  to  time  to 
find  tin.  Tin  was  discovered  in  California  as  early  as  1840,  but 
there  was  no  mining  done  until  1868.  Only  for  a  short  time 
were  the  mines  operated ;  they  were  then  closed  down,  and 
remained  so  until  1888.  In  this  year  an  American  company 
bought  the  property  with  the  intention  of  operating,  but  it  was 
sold  to  an  English  syndicate  before  two  years  had  passed.2 
Something  like  S8oo,ooo  were  spent,  but  no  special  results 
were  secured.  The  total  product  of  the  mine  was  269,000 
Ibs.  of  tin  valued  at  $56,ooo.3  The  Harney  Peak  mine  is  the 
story  of  another  futile  attempt  to  get  tin  in  commercial  quanti- 
ties. The  Harney  Peak,  as  it  is  familiarly  called,  is  situated 
near  Custer  City,  S.  D.  A  great  deal  of  money  has  been 
spent  in  the  development  of  this  mine,  but  it  is  doubtful  if 


THE   TIN-PLATE    INDUSTRY  291 

more  than  ten  tons  of  metal  have  been  taken  out  of  the 
ground.1  The  English  capitalists  were  also  heavily  interested 
in  this  attempt.  In  Alabama,  North  Carolina,  and  Virginia  tin- 
bearing  rock  has  been  found.  In  no  sense  can  the  United 
States  be  regarded  as  a  tin-producing  country.2 

The  cost  of  mining  tin  varies  with  locality,  kind  of  labor 
employed,  and  character  of  the  ore.  The  average  cost  of  break- 
ing and  selecting  ores  in  the  Cornish  mines  is  from  45.  to  8s.,  per 
ton  of  ore  ;  the  depreciation  of  machinery  is  estimated  at  2d. 
The  total  mining  charges  average  £,12  to  the  ton  of  tin,  the 
dressing  costs  ,£9,  and  management,  expense  of  buildings,  and 
wear  and  tear  on  machinery  carry  the  amount  to  ,£35  per  ton 
of  tin.  This  statement  of  cost  is  not  altogether  accurate,  but  is 
probably  very  near  the  truth.  Banca  mines  have  the  advantage 
of  cheap  labor.  The  price  paid  there  for  experienced  labor  is 
£,1  per  month.  The  workmen  average  twelve  hundredweight 
of  metallic  tin  per  year.3  The  yield  of  the  Cornwall  mines  is 
about  20  per  cent  of  the  tin  ore  or  45  Ibs.  of  tin  to  the  ton  of  ore. 

Before  the  ore  is  ready  for  reduction  to  pig  tin,  the  sulphur 
and  arsenic  must  be  driven  off  by  roasting  the  ore.  This  requires 
from  twelve  to  eighteen  hours.  The  consumption  of  fuel  for 
refining  is  thirty  to  thirty-five  hundredweight  per  ton  of  metallic 
tin.  The  tin  of  the  Banca  mines  is  almost  pure,  so  that  it  has  a 
decided  advantage  in  cost  of  production.  Although  England  is 
so  near  to  the  Cornish  mines  the  price  of  block  tin  in  London  is 
about  the  same  as  in  New  York.  The  prices  given  on  March 
4,  1898,  at  New  York,  per  long  ton  of  2240  Ibs.,  was  5310.44. 
At  London  Straits  tin  (Banca)  was  sold  for  $3ii.io.4  It  will 
be  seen  from  this  statement  that  the  manufacturers  of  tin-plate 
in  England  have  no  particular  advantage  over  the  American 
producers  so  far  as  the  raw  material  is  concerned.  It  might  be 

1  Sf/^r.r,  //>;,/. 

-The  total  tin  production  of  the  world  in  1805  was  estimated  at  186,786,880  Ibs. 
Of  this  amount  the  I'nited  States  imported  54.252,045  Ibs..  or  29  per  cent,  at  a  valu- 
ation of  .Sj, 405, 619.  See  L".  S.  ( leolo^ical  Survey,  18(15  :  Mineral  Industry,  Vol.  I, 
p.  457.  :i  Tin  and  Terne  Plato,  ].  \>.  Weeks  p.  I  }. 

4  The  prices  ijiven  above  are  taken  from  the  Monthly  Summary  of  Finance  and 
Commerce  of  the  I".  S.,  Feb.  I,  iS<jS,  pp.  1207,  1218.  The  price  in  New  York 
was  14.351'.  Pcr  I'"Und.  and  -/()4  I  Go.  j</.  per  tun  in  London. 


TRUSTS,   POOLS  AND   CORPORATIONS 


urged  that  the  Cornish  mines  undersell  the  Straits,  but  the  fact 
is  that  Cornish  mines  are  not  able  to  supply  all  the  English 
demand  for  tin.  Naturally  the  price  of  tin  is  governed  by  the 
price  of  Straits  tin. 

II 

The  United  States  have  always  been  a  large  consumer  of 
tin-plate.  In  1892  this  country  was  taking  60  per  cent  of  the 
English  production  of  the  commodity.  A  remarkable  falling  off 
in  the  imports  occurred  in  1898.  This  decline  began  with  the 
tariff  legislation  of  1890.  The  table  below  tells  the  story  more 
forcibly  than  words  can. 

IMPORTATIONS  OF  ENGLISH  TIN-PLATE 


1893 
1894 

1895 
1896 

1897 


628,425,902  Ibs. 
454,160,826  " 
508,038,938  « 
385,138,983  « 
230,073,683  " 


A  similar  decline  has  taken  place  in  the  imports  of  black  plates 
not  yet  tinned,  as  indicated  in  the  following  table  : 

IMPORTATION  OF  ENGLISH  BLACK  PLATES 


YEAR                     LONG  TONS        POUNDS 

1893   •         

— 

— 

I894   ....... 

— 

— 

1895   ......... 

8914 

19,967,560 

1896   

3I2S 

7,006,720 

1897   ......... 

689 

1,  554,360 

iSgS1  

I7I 

38  1  ,040 

The  demand  as  well  as  the  consumption  of  tin  and  terne 
plates  has  not  decreased  in  any  way,  so  that  the  source  of  supply 
must  be  looked  for  elsewhere  than  in  England.  This  demand 
is  therefore  largely  supplied  by  the  American  industry.  The 
statement  here  made  is  further  upheld  by  the  fact  that  in  1892 
some  13,642,719  Ibs.  of  tin-plate  were  made  in  the  United 
States,  31  per  cent  of  which  was  manufactured  from  foreign 
black  plates.  The  amount  had  increased  enormously  in  1897, 
so  that  446,982,063  Ibs.  were  produced,  and  of  this  amount  only 

1  January  and  February,  1898.      Tin  and  Terne,  March  24,  1898. 


THE  TIN-PLATE   INDUSTRY  293 

one  per  cent  was  made  from  foreign  black  plates.1  These  facts 
certainly  indicate  the  existence  of  a  rapidly  growing  industry. 

Leaving  the  matter  of  the  tariff  out  of  consideration  for  the 
time  being,  the  United  States  were  handicapped  in  the  early 
history  of  the  industry  by  the  high  price  of  labor,  the  lack  of 
technical  knowledge  concerning  the  industry,  and  the  distance 
of  iron  ore  from  fuel.  These  difficulties  have  been  overcome  in 
some  measure.  The  industrial  depression  from  1892-97  was 
a  decided  aid  to  the  growing  industry.  The  wages  of  labor  fell 
about  15  per  cent  in  this  period,  although  there  is  a  marked 
tendency  at  present  to  recover  from  the  decline.  The  fall  in 
the  wages  of  labor  placed  the  English  and  American  makers 
more  nearly  on  a  basis  of  equality.  As  a  general  thing,  Ameri- 
can labor  is  quicker  and  works  harder  than  even  the  English 
workingman.  This  does  not  hold  true  in  the  tin  industry. 
The  reduction  in  wages  just  referred  to  was  not  sufficient  of 
itself  to  make  up  differences  in  cost.  According  to  Sir  R. 
Griffon,  the  Welsh  laborer  averages  £i  2s.  $d.  per  week, 
equivalent  to  85.46,  while  in  Pennsylvania  the  wages  average 
£10.68  per  week.2  The  higher  American  wages  are  not  accom- 
panied by  an  increased  efficiency  of  labor.  Taken  all  in  all,  the 
Welsh  producer  makes  tin-plate  about  30  per  cent  cheaper  than 
the  American,  but  the  latter  when  purchasing  from  the  former 
has  never  got  the  benefit  of  the  $2.20  per  box  cost.  Tin  can  be 
delivered  in  Xew  York,  freight  paid,  for  $2.49  per  box3  by  the 
English  merchant.  Tin  never  reached  this  point  until  the 
Americans  began  to  make  it. 

The  knowledge  of  the  method  of  manufacture  had  also  to 
be  acquired.  This  gave  for  a  while  an  additional  advantage 
to  the  English  makers.  The  distance  of  ore  from  fuel  was 
another  question  involving  delay  and  expense.  In  this  matter 
the  last  five  years  have  seen  a  remarkable  improvement.  Ore 
is  now  mined  by  steam  shovels  and  then  conveyed  in  steel 
barges  to  the  ports  of  Eake  Erie,  where  it  is  sent  by  rail  to  the 
smelters.  The  old  method  of  bringing  fuel  to  the  ore  has  been 
abandoned,  the  ore  is  now  brought  to  the  fuel.  Lower  freight 


294  TRUSTS,   POOLS  AND   CORPORATIONS 

rates  have  made  this  possible.  So  cheap  has  steel  become  in 
this  country  through  these  various  processes  and  changes  that 
it  is  now  exported  to  England.1 

In  the  cost  of  steel  bars  (Bessemer)  the  tin-plate  makers  of 
the  United  States  had  an  advantage  over  the  English  of  about 
20  per  cent  in  April,  i8<^6.2  In  March,  1897,  the  price  ranged 
from  $15.50  per  ton  to  $i6.oo.3  As  the  price  has  not  materially 
changed  the  advantage  still  remains.  Mr.  J.  D.  Weeks,  in  an 
article  on  the  Tin-Plate  Industry,  referred  to  above,  gives 
four  statements  of  cost  of  manufacture  in  Wales.  An  English 
correspondent  gives  one,  placing  the  cost  of  making  a  box 
14  x  20  I  C  tin-plates  at  13.?.  ^d.  The  United  States  Consul  gives 
another  estimate,  placing  the  cost  at  us.  g.6d.  Still  another 
statement  is  made  in  which  \2s.  2\d.  is  regarded  as  the 
expense  of  production.  The  most  conservative  and  reliable 
report,  which  proves  to  be  that  of  a  former  manufacturer  of  tin- 
plate,  fixes  the  cost  at  12s.  6d.  This  last  amount  is  equivalent 
in  our  money  to  $3.11.  A  deduction  of  18  cents  should  be 
made  from  this  amount  for  saving  in  waste,  making  the  cost 
equivalent  to  $2.93.4  This  estimate  is  rather  old.  Since  its 

1  Eng.  Foreign  Office,  Mis.  Rep.  Xo.  426,  p.  5. 

-  Price  steel  bars  (Bessemer)  U.  S.,  $15.50  per  ton  =  ^3  2s. 

"  England,  "          ,£3  17.5-. 

8  Monthly  Summary  U.  S.  Commerce,  p.  1212. 
4  J.  D.  Weeks,  Tin-Plate  Industry,  1892,  p.  22. 

STATEMENT  OF  COST 

Steel  bars  at  works,  136  Ibs.  at  ^4  155.  per  ton       .         .  $1-39 

Block  tin          .........  .62 

Sulphuric  acid          ........  .10 

Flux  for  tinning    .........  .01 

Coal  for  steam  and  heating  works   .          .          .          .         .  .16 

Costing  for  general  repairs        ......  .04 

Clay,  brick,  lumber  for  boxes             .....  .08 

Nails,  hemp,  skin  brushes,  bran       ...                  .  .01?, 

I 'aim  oil            .         .         .          .          .          .          .          .          .  .06 

Other  items  not  enumerated             .....  .04,', 

Material 

Labor    . 


$3.11 
Credit  for  waste  .18 


THE   TIN-PLATE    INDUSTRY  295 

date,  1878,  a  great  many  improvements  have  been  made  in 
machinery,  and  the  cost  of  steel  has  been  reduced  very  materially. 
With  the  cost  of  steel  just  given  the  expense  of  production 
would  be  cut  down  to  $2.56.  The  improved  machinery  will 
still  further  reduce  this  price  to  the  one  now  ruling  in  England, 
$2.20.  As  will  be  remembered,  the  American  wages  averaged 
about  twice  those  paid  in  Wales.  This  will  materially  increase 
the  cost  of  the  American  product,  so  that  it  is  not  likely  that 
American  tin-plate  is  manufactured  under  a  cost  of  $2.75  per 
box  for  first-class  material.  The  present  price  of  tin-plate  in 
this  country  leaves  a  margin  of  75  to  85  cents  per  box  for 
our  producers.  When  the  commissions  and  profits  of  middle 
men  are  taken  from  this,  it  will  be  seen  that  tin-plate  is  being 
sold  close  to  cost.  If  this  is  true,  an  adjustment  of  prices  to 
the  industry  and  the  demand  must  follow  which  will  again  give 
the  English  industry  some  hope  of  entering  our  markets. 

Properly  equipped  machinery  was  difficult  to  secure  at  first. 
This  part  of  the  problem  has  been  met  by  inventions  and 
improvements  over  the  English  machines.  In  this  matter  it 
is  probable  that  the  Americans  have  been  most  successful  in 
reducing  the  expense.  The  preparation  of  steel  is  the  best 
example.  In  tinning  machinery  the  advance  has  been  much 
slower  and  less  satisfactory.  Under  the  English  system  the 
mills  are  run  by  one  central  engine,  while  in  this  country  the 
tendency  has  been  to  run  an  engine  for  each  set  of  mills. 
This  increases  the  expense  for  coal  and  adds  to  the  cost  of 
manufacture,  but  gives  greater  efficiency.  The  mills  in  the 
United  States  are  better  built  and  can  do  more  work.  It  re- 
mains to  be  seen  whether  the  industrv  will  warrant  the  elaborate 
preparations  which  have  been  made. 

Ill 

The  legislation  for  the  establishment  of  the  tin-plate  industry 
rests  upon  three  ideas  :  first,  that  seventy  millions  of  people 
should  not  depend  upon  Welsh  works  for  tin-plate ;  second, 
that  the  foreign  tin-plate  is  poorly  made  and  does  not  meet  our 
particular  wants;  third,  that  the  country  needs  a  new  industry 
in  which  more  labor  can  be  employed.  In  these  three  state- 


296  TRUSTS,   POOLS  AND   CORPORATIONS 

ments  we  have  a  blending  of  the  commercial,  the  economic, 
and  the  political.  So  long  as  the  foreign  makers  possessed  a 
monopoly,  they  refused  to  listen  to  any  suggestions  from  this 
side  of  the  water  concerning  the  improvement  of  their  plate. 
There  were  also  times  when  the  foreign  dealers  took  advantage 
of  the  scarcity  of  tin-plate  in  this  country  to  force  up  the  price. 
This  attitude  naturally  influenced  very  considerably  the  Ameri- 
can mind.  Behind  the  scenes  another  class,  the  men  who 
owned  supposed  tin  mines,  endeavored  to  secure  the  attention 
of  Congress.  They  were  anxious  that  the  tin-plate  industry 
should  be  encouraged,  provided  that  block  tin  was  put  on  the 
tariff  list.  Manufacturers  of  steel  were  ready  to  make  tin- 
plates  if  adequate  protection  was  given  them.  When  the 
various  elements,  just  mentioned,  were  coupled  with  public 
opinion,  which  after  all  was  public  indifference,  and  brought  to 
bear  upon  Congress,  the  necessary  legislation  was  forthcoming. 
The  new  industry  having  received  these  necessary  conditions, 
it  was  considered  that  time  alone  was  all  that  was  needed  to 
bring  it  into  full  fruitage. 

Previous  to  1890  block  tin  had  been  on  the  free  list  for  twenty 
years,  while  tin-plate  had  been  subject  to  a  duty  since  1864. 
Under  the  tariff  of  1883,  no  tin-plate  was  produced  in  this  coun- 
try. The  consumers  of  the  article  paid  $35,000,000  in  duties 
for  the  support  of  an  industry  that  did  not  come  into  exist- 
ence.1 The  probable  reason  for  the  failure  to  establish  an 
industry  was  the  lack  of  facilities  for  making  steel  plates.  In 
addition  to  this  the  financial  condition  of  the  country  hardly 
warranted  any  extension  of  enterprise.  The  tariff  of  1864 
placed  a  duty  of  2\  cents  per  pound  on  "all  imports  of  tin-plates 
and  iron  galvanized,  or  coated  with  any  metal  by  electric  batter- 
ies or  otherwise."  The  Treasury  Department  so  construed  the 
law  that  a  duty  of  15  percent  "ad  valorem"  was  substituted 
in  the  place  of  the  original  amount.2  Although  the  protection 
thus  given  was  low,  nevertheless  several  plants  were  built  in  the 
hope  that  the  high  price  then  ruling  would  continue.  It  did 
not  do  so,  and  the  plants  were  forced  out  of  the  business.3 


JL    (_1VJ    .-5U,     clliU     L11U     JJjailLS     \VC1C    1U1V-CU     UUL    UJL 

1  House  Reports,  52  Cong.,  I  Sess.,  Vol.  4,  No.  1040. 
s  Plants    were    established    at   Wellsville,    Ohio,    1872; 
emrnier,  Pa.,  1875. 


iaiu. 

Leechburg,    Pa.,    1873; 


THE  TIN-PLATE   INDUSTRY  297 

There  was  no  real  effort  to  manufacture  tin-plate  until  the 
McKinley  Bill  was  adopted.  This  act  received  the  sanction  of 
Congress  October  i,  1890.  The  clause  relating  to  tin  went  into 
effect  July  i,  1891.  It  was  declared  that  after  that  date  tin  and 
terne  plates  should  pay  a  duty  of  2.2  cents  per  pound  instead  of 
one  cent  as  before.  The  very  significant  addition  was  made  that 
"after  October  i,  1897,  tin  and  terne  plates  lighter  than  63  Ibs. 
per  one  hundred  square  feet  should  be  admitted  free  of  duty, 
if  it  shall  be  made  to  appear  to  the  satisfaction  of  the  President 
that  the  aggregate  quantity  of  such  plates  lighter  than  63  Ibs. 
per  one  hundred  square  feet,  produced  in  the  United  States 
during  either  of  the  six  years  next  preceding  June  30,  1897, 
has  equalled  one-third  the  amount  of  such  plates  imported  and 
entered  for  consumption  during  any  fiscal  year  after  the  passage 
of  this  act  and  prior  to  October  i,  1897. "*  Several  conditions 
were  added  to  this  part  of  the  bill  with  the  intention  of  making 
out  the  highest  production  and  the  smallest  importations.  Under 
the  rule  of  the  Treasury  Department  it  was  permissible  to  com- 
pare the  highest  production  of  any  one  year  with  the  lowest 
importation  of  any  single  year.  Imported  plates  upon  which 
a  drawback  had  been  received,  when  exported  in  the  form  of 
manufactured  articles,  were  not  to  be  counted  as  importations. 
On  the  other  hand,  black  plates  when  imported  for  tinning  and 
coated  in  this  country  were  to  be  regarded  as  part  of  the  coun- 
try's product.  The  miners  of  tin  were  not  forgotten  in  the  bill. 
A  duty  of  four  cents  per  pound  was  placed  on  pig  tin.  The  pro- 
visions of  this  part  of  the  act  were  to  take  effect  July  i,  1893, 
and  to  continue  in  existence  two  years.  If  at  this  time  it  could 
be  shown  that  the  production  of  block  tin  had  reached  five  thou- 
sand tons,  the  duty  was  to  be  continued. 

Many  protests  were  made  against  this  legislation  before  and 
after  the  .enactment  of  the  bill.  The  Tin-Plate  Consumers' 
League,  consisting  of  the  representatives  of  the  canning,  oil,  and 
manufacturing  interests,  sent  delegates  to  the  House  Committee 
of  Ways  and  Means.2  Soon  after  the  passage  of  the  McKinley 
Act  the  Republicans  were  defeated  in  the  Congressional  elec- 

1  McKinley  Bill,  Oct.  I,  1890. 

-  Iluuse  Reports,  52  Cong.,  I  Sess.,  Vol.  4,  Xo.  1040. 


298  TRUSTS,    POOLS   AND    CORPORATIONS 

tions.  Naturally  the  opponents  of  the  tinning  classes  hoped 
that  some  reactionary  legislation  would  be  brought  about,  and 
this  change  in  the  character  of  Congress  encouraged  the  inter- 
ests above  mentioned  to  appear  before  the  committee.  Several 
attempts  were  made  to  alter  the  bill,  and  these  furnished  occasions 
for  the  appearance  of  various  delegates  before  the  Committee  on 
Ways  and  Means.  The  introduction  and  the  consideration  of 
a  bill  to  reduce  the  duty  on  tin-plate  to  one  cent  until  October  i, 
1894,  after  which  date  the  articles  should  be  admitted  free,  fairly 
represents  the  views  held  in  Congress  on  the  subject.1  Two 
reports  were  presented  by  the  House  Committee.  The  majority 
report  upheld  the  bill  on  the  ground  that  little  or  no  tin-plate 
had  yet  been  produced,  and  that  the  legislation  thus  far  resulted 
in  the  forestalling  of  the  market  and  produced  a  speculation  in 
prices  ruinous  to  consumers.  In  support  of  these  arguments  the 
statements  of  companies  and  business  firms  were  quoted  in  the 
majority  report.  These  all  showed  higher  prices  and  a  very 
small  manufacture.  The  minority  report  was  a  vindication  of 
the  tariff  and  the  need  of  such  an  industry.  It  was  shown  that 
in  the  twenty  years  from  1871-91  the  consumers  of  tin  had 
paid  foreigners  8307,341,404,  exclusive  of  freights  and  im- 
porter's profits,  for  tin  and  tin-plates.  The  bill  finally  reached 
the  Senate  Finance  Committee,  but  was  never  acted  upon.2 

A  similar  attempt  was  made  to  reduce  the  tariff  on  block  tin. 
On  February  27,  1893,  a  bill  was  introduced  by  the  House  Com- 
mittee of  Ways  and  Means  to  admit  free  of  duty  on  and  after 
July  i,  1893,  imports  of  bar,  block,  and  pig  tin,  cassiterite  or 
black  oxide  of  tin.3  The  committee  presented  with  the  bill  much 
evidence  to  show  that  the  then  existing  price  of  raw  tin  was  a 
hardship  to  consumers.  The  canning  interests  found  that  they 
were  compelled  to  pay  81.15  per  dozen  of  one  quart  cans  in 
1893  as  against  70  cents  in  1890.  In  this  connection  the  state- 
ment of  Mr.  Schiver,  president  of  a  Baltimore  canning  company, 
was  offered  by  the  committee  as  evidence.  Mr.  Schiver  stated 
that  up  to  February,  1893,  he  was  unable  to  secure  any  Ameri- 


,  Vol.  4,  Xo.  1040. 


THE   TIN-PLATE    INDUSTRY  299 

can  plate,  and  that  he  was  now  paying  33  per  cent  more  for  tin 
goods  than  was  asked  in  Europe.1  The  evidence  of  the  committee, 
together  with  their  favorable  report,  were  not  sufficient  to  per- 
suade Congress  to  make  the  bill  a  law.  The  Senate  as  well  as 
the  House  was  besieged  with  memorials  praying  for  the  repeal 
of  the  duty  on  block  tin.2  But  to  no  purpose.  The  McKinley 
Bill  was  not  modified  until  the  Republican  Congress  had  been 
superseded  by  a  Democratic  majority.  This  change  occurred 
in  the  fall  of  1893. 

The  Wilson  Bill  of  1894  reduced  the  rate  on  tin  and  terne 
plates  from  2.2  cents  per  pound  to  i\  cents  per  pound,  and  block 
tin  was  placed  upon  the  free  list.  The  Democratic  Congress 
soon  after  gave  place  to  a  Republican  one,  and  the  Dingley  Bill 
of  1897  again  modified  the  tariff  on  tin  so  that  the  rate  was 
placed  at  i\  cents  and  block  tin  allowed  to  remain  on  the  free 
list. 

The  act  of  1890  was  the  creator  of  the  tin-plate  industry. 
The  incentive  from  it  was  sufficiently  great  to  draw  a  good 
deal  of  capital  into  the  field.  Although  the  legislation  since 
then  has  made  a  lower  rate,  nevertheless  the  industry  was  well 
enough  established  in  the  years  intervening  between  1890  and 
1894  to  retain  its  place  and  to  grow.  The  elements  of  growth 
more  powerful  than  legislation,  in  the  opinion  of  the  writer, 
were  the  low  prices  of  steel  and  wages  existing  during  this 
period. 

It  remains  to  test  this  industry  on  the  following  points:  (i) 
growth  of  production,  (2)  reduction  of  imports,  (3)  number  of 
plants,  (4)  comparison  of  prices,  (5)  effect  on  foreign  manufac- 
tures, and  (6)  probability  of  continued  growth.  This  will  be 
done  in  the  final  section  of  our  study. 

IV 

i.  The  special  agent  of  the  Treasury  Department  in  a  report 
of  April  26,  1892,  states  that  "the  firms  replying  to  his  inquiry 


300 


TRUSTS,   POOLS  AND   CORPORATIONS 


declared  that  they  had  manufactured  no  tin-plates  as  yet." l 
The  report  of  the  same  agent  gives  for  the  year  ending  June  31, 
1892,  thirteen  million  pounds  as  the  product  of  American  tin- 
plate.  The  industry  evidently  did  not  get  well  started  until  the 
middle  of  the  year,  1892,  but  from  that  time  the  output  has 
steadily  increased.  The  table  given  below  indicates  the  rapid 
development  of  the  industry.  The  yearly  production  of  tin- 
plate  now  reaches  nearly  five  hundred  million  pounds.  The 

PRODUCTION  OF  TIN-PLATE  IN  THE  UNITED  STATES 


YEAR 

POUNDS 

PER  CENT  FROM 
FOREIGN  PLATE 

1892    

13,646,719 

IT  CQ 
31.55 

1893    

99,819,212 

56-32 

1894    

139,223,467 

38.26 

1895    

193,801,073 

I7-I5 

1896    

307,228,621 

I.38 

1897    

446,982,063 

.OI 

—  From  Special  Report  to  Treasury  by  Ira  Ayer,  Jan.  28,  1898. 

decline  in  the  importation  of  black  plates  shows  the  ability  of 
manufacturers  to  furnish  these  for  tinning  purposes.  In  1893 
over  half  the  black  plates  from  which  tin  and  terne  plates  are 
made  were  furnished  by  foreign  mills.  This  ratio  has  so  far 
declined  that  in  1897  almost  none  of  the  American  tin-plate 
was  made  from  imported  plates. 

2.  The  decline  in  the  imports  of  tin  and  terne  plates  has  been 
as  rapid  and  as  marked  as  the  increase  in  the  production.  The 
people  of  the  United  States  consume  between  six  and  seven 
hundred  million  pounds  of  tin  and  terne  plates  each  year.  At 
times  the  importations  for  a  single  year  have  gone  above  this 
mark.  The  fear  of  tariff  legislation  and  the  intention  of  avoid- 
ing any  increase  in  the  duty  were  the  causes  of  such  heavy 
shipments.  Two  years  are  particularly  noticeable  in  this  par- 
ticular, 1890  and  1891. 

1  Senate  Ex.  Doc.,  52  Cong.,  2  Sess.,  Vol.  6,  No.  102. 


THE   TIN-PLATE    INDUSTRY  301 

IMPORTS  OF  TIN  AND  TERNE  PLATES 
YEAR  POI-NDS 

1890 737.935.°79 

1891 734,425,267 

1892 600,819,566 

1893 628,425,902 

1894 45.1,160,826 

1895 508,038,938 

1896 385,i3x,983 

1897 .  230,073,683 

—  United  States  Custom  House  Reports. 

Of  the  six  hundred  and  seventy-seven  million  pounds  con- 
sumed in  the  United  States  in  1897  nearly  two-thirds  were 
manufactured  within  its  borders.  When  this  statement  is  com- 
pared with  the  fact  that  no  tin  and  terne  plates  were  made  in 
this  country  in  1890,  the  growth  of  the  industry  seems  almost 
marvellous. 

3.  March,  1898,  saw  forty-one  plants  operating  235  mills 
engaged  in  the  industry.1  The  capital  invested  is  variously 
estimated  from  three  to  five  million  of  dollars.  The  number  of 
persons  employed  has  been  placed  as  high  as  fifty  thousand. 
The  Congressional  estimate  at  the  time  of  the  Wilson  Bill  was 
twenty-four  thousand,  but  this  is  also  too  large.2  It  is  not 
likely  that  over  eighteen  thousand  persons  are  connected  with 
the  industry.  But  even  this  number  is  large  when  the  short 
existence  of  the  industry  is  taken  into  consideration. 

4  During  the  last  two  years  the  price  of  Bessemer  tin-plates 
1C  14  x  20,  100  Ib.  box,  has  been  from  $3.60  to  83.85  at 
New  York.:J  In  the  period  from  1880-90  the  price  for  the 
same  kind  of  tin  varied  from  85.37.',  to  $7-4  During  the  same 
period  the  price  at  Liverpool  ranged  from  15^.  6d.  to  34^.°  The 
price  in  1890  was  much  less  than  this  last  quotation.  On  the 
basis  of  our  money  the  Knglish  price  was  83.71  to  89.16.  Dur- 
ing the  last  eight  years  the  price  of  tin-plate  in  this  country  has 
steadily  declined.  The  tariff  is  81.62  per  box  of  108  Ibs.,  and 


302  TRUSTS,    POOLS   AND    CORPORATIONS 

in  consequence  English  plates  are  now  delivered  in  New  York 
at  just  this  sum  below  the  prices  ruling  in  the  United  States. 
Although  it  is  now  possible  to  buy  English  plates  at  this  very 
low  rate,  it  is  not  at  all  certain  that  such  would  have  been  the 
case  if  the  present  industry  had  not  come  into  existence.  Com- 
parison with  prices  previous  to  1890  fully  warrants  this  state- 
ment. Two  dollars  and  thirty-seven  cents  are  about  the  minimum 
price  for  plates  delivered  at  Liverpool.  The  ocean  freight  will 
average  13  cents  per  one  hundred  pounds.  Add  to  these  items 
the  tariff  charge  of  one  dollar  and  sixty-two  cents  and  the  price 
of  English  plates  reaches  $4.12  for  the  American  consumer. 
Mr.  Cronemeyer,  the  president  of  the  American  Tin-Plate  Asso- 
ciation, stated  before  the  House  Committee  of  Ways  and  Means 
that  three  dollars  and  forty-five  cents  left  a  moderate  profit  for 
first-class  tin-plates.1  On  this  basis  the  American  consumer 
pays  ninety-five  cents  more  per  box  than  he  would  for  the 
English  plate  provided  no  tariff  existed.  At  the  same  time  it  is 
true  that  the  price  of  English  plates  would  be  higher  than  $3.75 
per  box  if  this  industry  had  not  come  into  existence. 

The  Tin  and  Tcrnc?  commenting  on  the  condition  of  the 
market,  says,  "  The  market  has  continued  very  unsettled  and 
unsatisfactory  to  both  buyer  and  seller  alike.  War  and  rumors 
of  war,  trusts  and  rumors  of  trusts,  all  have  a  disturbing  influ- 
ence, and  in  no  branch  of  metal  industry  have  prices  been  as 
unsettled  and  as  confusing  as  in  tin-plates.  There  is  a  wide 
range  between  the  high  seller  and  the  low  seller  on  spot  goods 
to-day,  and  a  wide  difference  of  opinion  in  regard  to  the  future 
market.  The  Indiana  mills  are  fairly  well  sold  up,  and  are 
rather  firm  in  their  views;  while  the  Pittsburg  mills,  it  is  re- 
ported, are  seeking  business  for  delivery  after  July  at  prices 
lower  than  anything  hitherto  made.  It  is  reported  that  some 
very  large  sales  —  100,000  boxes  —  have  been  closed  in  the  last 
few  clays  at  a  basis  below  82.70  per  box." 

The  statement  given  above  is  a  forecast  of  the  future  con- 
dition of  the  industry.  The  truth  of  the  matter  is  that  already 
there  are  more  than  enough  mills  to  supply  the  market.  Just 
how  far  the  demoralization  may  extend  is  difficult  to  say,  but  it 

!  Kng.  Kuivik'n  Office  Report,  Mis.  Xn.  426,  p.  9.  '2  March  24,  1898. 


THE   TIN-PLATE    INDUSTRY  303 

is  more  than  likely  that  American  plate  will  fall  below  the  three- 
dollar  line.  If  this  happens,  we  may  look  for  repeated  attempts 
to  organize  trusts  and  to  close  down  some  of  the  weaker  plants. 
A  period  of  readjustment  will  follow,  and  higher  prices  again 
prevail. 

5.  The  establishment  of  the  industry  has  had  a  marked  effect 
upon  foreign  makers  of  tin-plate.     This  is  well  illustrated  by 
the  report  of  the  American  consul  at  Cardiff  in  which  the  fol- 
lowing is  given  : l  "  The  tin-plate  trade  of  South  Wales  has  per- 
sistently gone  from  bad  to  worse  during  the  last  few  months." 
In   a  manifesto  appearing   in  the  Industrial  World,  the  official 
organ  of  the  Tin-Plate  Worker's  Union,  are  several  interesting 
statements  that  corroborate  the  opinion  of  the  American  consul. 
The  one  now   given   sets  forth   the  condition   of   the  tin-plate 
business  in  a  dismal  picture.      "At  the  beginning  of  the  week 
144  out  of  our  512  mills  were  idle.      This  can  be  contrasted 
with  the  state  of  affairs  before  the  McKinley  tariff  came  into 
operation.      In   January,    1889,  there   existed   482    mills,    17   of 
which  were  idle.   .   .  .     The  Welsh  mills,  with  the  comparatively 
few7  mills  on  the  continent  of  Europe,  are  capable  of  fully  meet- 
ing the  requirements  of   the  world   for  plates;    that  being  so, 
every  box   of   plates   made   in   America    means    a    box    less    in 
Wales."  2      Many  other  statements  of  like  character  have  ap- 
peared  in   the  various    English   newspapers.      The  writers  are 
perfectly  aware  of  the  decline  of  the  English  industry  and  are 
fearful  that  the  American  market  will  be  forever  lost  to  them.3 
Mr.  John  H.  Rogers,  a  large  manufacturer  of  tin-plate  in   Eng- 
land, and  president  of  the  Tin-Plate  Makers'  Association,  in  a 
letter  to  the  Tin-Plate  Makers'  Union,  predicts  that  many  of  the 
men  will  lose  their  positions  and  that  the  coating  part  of  the 
business    will    leave   the   country.1     Preparations    have    already 
been  made  by  some  of  the  plants  to  change  their  business  into 
that  of  galvanizing.      All  these  facts  point  to  a  demoralization 
of  the  Welsh  trade  clue  evidently  to  a  falling  off  in  the  American 
demand. 

6.  One  final  question  remains  for  our  consideration  :  What  is 


304  TRUSTS,   POOLS  AND   CORPORATIONS 

the  probability  of  the  continued  existence  of  the  industry  ?  The 
elements  of  success  in  the  trade  are  the  tariff,  the  cheapened 
production  of  steel,  and  the  low  price  of  labor.  These  three 
things  have  made  it  possible  for  the  industry  to  gain  a  foothold 
in  this  country.  The  tariff  seems  to  have  given  the  incentive 
and  at  the  same  time  to  have  protected  the  business  from  exces- 
sive competition  in  the  beginning.  The  fact,  as  shown  by  pre- 
vious tariffs,  that  such  protection  alone  was  unable  to  create 
the  industry,  gives  additional  importance  to  the  other  elements. 
If  steel  had  not  been  low  in  price  at  the  time  wages  were  falling, 
it  is  doubtful  whether  the  McKinley  Act  would  have  created  the 
industry.  In  regard  to  the  future,  the  indications  are  that  steel 
will  continue  low  in  price  for  some  time  to  come.  The  exports 
of  steel  made  in  the  last  two  years  certainly  point  to  a  decided 
advantage  in  this  material  over  the  English  industry.  So  long 
as  the  progress  in  mining  machinery  and  rolling  mills  continues, 
we  may  expect  to  retain  this  advantage.  Wages,  however,  are 
certain  to  rise,  and  it  is  more  than  likely  that  two  years  will  see 
them  restored  to  the  old  level.  Unless  this  advance  can  be  offset 
by  improved  machinery,  which  is  more  than  probable,  there  must 
be  a  slight  rise  in  the  price  of  tin-plate  and  with  it  some  encour- 
agement to  foreign  makers  to  enter  our  markets. 

About  the  only  market  now  left  to  the  English  makers  is  that 
of  the  Pacific  coast.  The  freight  rate  on  one  hundred  pounds 
from  Wales  to  San  Francisco  is  18  cents  ;  the  rate  from  Pittsburg 
to  the  same  city  is  61^  cents.1  The  price  of  English  plates,  duty 
paid,  at  the  latter  port  would  be  $4.17.  If  the  price  for  Ameri- 
can plates  is  $3.45,  then  two  makes  are  about  the  same,  $4.17 
and  84.16  per  boxes  of  108  Ibs.  delivered.  Even  this  market  is 
likely  to  be  closed  to  England  if  the  price  falls  below  $3.45  per  box. 

PER  100  LBS. 

1  South  Wales  to  Atlantic  ports         .         .         .         .         .  120. 

"           Pacific        "              .....  iSc. 

"           "          Gulf           "             150. 

Pittsburg              Atlantic  coast          .         ,         .         .         .  i;c. 

Pacific         "             .         .         .         .  6i\c. 

Indiana               Gulf            "             .....  2oc. 

New  York           Chicago                   .....  2oc. 

—  From  Eng.  For.  Office  Report,  Mis.  Xo.  426,  p.  13. 


THE   TIN-PLATE    INDUSTRY  305 

The  American  tin-plate  industry  will  undoubtedly  continue  in 
existence.  At  the  present,  combinations  and  trusts  threaten  to 
control  the  industry.  A  short-sighted  policy  on  the  part  of  the 
managers  may  lead  to  higher  prices  and  renewed  competition 
with  English  makers.  Such  an  organization  is  more  likely  to 
cut  expenses  and  hold  the  price  just  below  the  point  of  foreign 
competition,  so  that  the  danger  from  foreign  rivalry  is  not  great. 
The  industry  is  not  so  dependent  upon  the  tariff  as  might  be 
supposed,  and  the  actual  possession  of  the  market,  accompanied 
by  good  product  and  sensible  management,  will  make  it  possible 
to  meet  the  foreign  competition  as  the  tariff  is  lowered. 

The  American  consumer  now  pays  about  ninety-five  cents 
more  for  American  tin  than  the  price  of  English  plate  delivered 
at  New  York.  This  is  really  a  premium  for  the  maintenance  of 
the  American  industry.  If  in  the  course  of  ten  or  fifteen  years 
our  manufacturers  can  meet  the  English  price,  the  cost,  expense, 
and  trouble  in  creating  the  industry  have  been  justified.  As  it 
now  stands  three  things  may  endanger  the  industry  :  (i)  rise  in 
cost  of  steel,  (2)  in  wages,  (3)  and  in  block  tin.  If  this  rise 
should  occur  in  the  three  cases  at  the  same  time,  the  industry 
would  hardly  stand  under  the  blow.  As  has  already  been 
pointed  out,  steel  is  not  likely  to  increase  in  price,  while  the  out- 
put of  the  Banca  mines  will  protect  us  in  some  degree  from  any 
change  in  the  price  of  Welsh  block  tin.  At  the  same  time 
American  ingenuity  will  undoubtedly  increase  the  efficiency  of 
labor  so  that  the  disadvantages  now  labored  under  may  gradually 
disappear.  Taken  all  in  all,  the  development  of  this  industry 
is  a  remarkable  example  of  timely  legislation.  The  conditions 
were  present,  the  tariff  permitted  their  utilization,  but  in  no 
sense  must  the  importance  of  the  conditions  be  underestimated. 


THE  TIN-PLATE  COMBINATION 
I 

The  excessive  competition  of  the  many  tin-plate  plants  estab- 
lished under  the  hot-house  influences  of  the  tariff  of  1890,  in 
company  with  rising  prices  of  materials,  has  brought  about  the 


306  TRUSTS,   POOLS  AND   CORPORATIONS 

formation  of  a  combination  known  as  the  American  Tin-Plate 
Company.  Three  things  —  tariff,  low  price  of  steel,  and  low 
wages  —  fortunately  meeting  at  the  same  time  made  possible  the 
rapid  growth  of  this  industry.  In  1890  there  were  two  or  three 
plants  struggling  under  great  difficulties,  barely  competing  with 
foreign  makers.  The  McKinley,  Wilson,  and  Dingley  bills  re- 
stricted this  competition  to  such  an  extent,  and  incited  enterprise 
to  such  a  degree,  that  1898  saw  forty-one  plants  engaged  in  the 
industry  with  every  promise  of  prosperity.1  The  transforma- 
tion, just  spoken  of,  was  almost  marvellous.  The  tariff,  check- 
ing foreign  competition,  made  it  possible  for  those  engaged 
in  the  industry  to  construct  their  mills  and  at  the  same  time 
secure  the  double  advantage  of  cheap  steel  and  low  wages. 
The  output  increased  rapidly  from  a  few  hundred  thousand 
pounds  to  hundreds  of  millions  of  pounds,2  while  the  great 
imports  of  early  years  fell  rapidly  to  less  than  a  third  of  what 
they  had  been  in  1890.  Meantime  the  English  industry  suf- 
fered greatly.  The  American  market  was  the  one  great  con- 
sumer of  English  tin.  There  had  been  some  dissatisfaction 
with  English  methods  and  English  manufacture,  so  that  the 
American  producers  had  no  opposition  to  fight  and  overcome 
among  the  consumers  of  English  tin  in  this  country.  In  fact, 
the  purchasers  of  the  commodity  seemed  ready  to  welcome  any 
movement  likely  to  affect  English  prices. 

The  price  during  the  period  of  English  supply  ranged  above 
85.00  per  box  1C  14x20  plates.  Although  the  tariff  added 
some  Si. 62  to  the  price  of  English  tin-plate  per  box  of  108  Ibs., 
nevertheless  so  great  was  the  influence  of  the  loss  of  the 
American  market  that  the  price  f.o.b.  at  Liverpool  fell  to  about 
S2.4O.3  This  in  a  way  set  a  limit  to  the  price  of  American  tin- 
plate,  so  that  the  quotation  in  this  country  has  remained  below 
five  dollars.  Since  1893  the  price  was  pushed,  under  the  rivalry 
of  the  different  tin-plate  makers,  lower  and  lower  below  this 
limit,  until  82.70  was  reached  in  December,  1898.*  This  was 
undoubtedly  pretty  near  cost. 


THE   TIN-PLATE    INDUSTRY  307 

This  movement  from  the  comparatively  high  prices  of  1893 
steadily  downwards  to  a  point  so  near  cost  was  not  a  healthy 
one.  It  was  indicative  of  excessive  output  and  competition. 
One-half  of  the  forty-one  plants  could  easily  have  supplied  the 
market.  The  fall  in  price  alone  was  not  sufficient  to  cause  the 
failure  of  any  of  the  plants,  although  new  factories  were  erected 
during  the  year,  increasing  the  competition.  The  industry 
would  only  be  permanently1  endangered  by  (i)  a  rise  in  the 
price  of  steel,  (2)  a  rise  in  wages,  (3)  an  increase  in  the  cost  of 
pig  tin,  or  (4)  the  repeal  of  the  tariff.  Any  one  of  these,  with 
the  exception  of  the  last,  was  hardly  sufficient  to  cause  the  con- 
tinued embarrassment  of  the  tin-plate  companies,  but  two  work- 
ing together  were  sure  to  make  the  conditions  of  manufacture 
exceedingly  hard,  while  a  movement  upward  in  the  case  of  the 
first  three  threatened  the  renewal  of  foreign  competition  and 
the  possible  extinction  of  the  business.  Two  at  least  of  the 
above-mentioned  possibilities  have  taken  place ;  tin  and  steel 
have  both  risen  in  the  last  year  and,  in  the  case  of  steel,  the 
chances  are  that  the  price  will  range  high  for  some  time  to 
come.  Block  tin  is  now  hard  to  get  and  is  rising  in  price.  In 
regard  to  labor,  there  is  considerable  question,  but  undoubtedly 
the  tendency  is  in  the  direction  of  higher  payment.  The  Amal- 
gamated Association  has  constantly  insisted  that  such  should 
be  the  case  in  the  iron  and  steel  industries,  and  the  tin-plate 
makers  will  be  compelled  to  follow  the  example  set  by  the  kin- 
dred industries. 

At  the  opening  of  the  year  pig  tin  was  selling  for  13^  cents 
per  pound  in  Xew  York.2  In  January,  1899,  the  quotation  had 
advanced  eleven  points,  the  market  showing  great  firmness  with 
every  indication  of  going  still  higher  and  possibly  equalling  the 
price  of  37.!  cents  of  1889.  This  increase  added  twenty-seven 
cents  to  the  cost  of  producing  a  box  of  1C  14  x  20  tin-plates. 
During  the  same  time  the  market  price  of  steel  billets  rose  two 
dollars  per  ton.  By  this  change  in  the  cost  of  material  eleven 
cents  more  were  added  to  the  charge  of  making  tin-plates.  In 
a  year's  time  the  manufacturer  found  he  was  producing  plates 


308 


TRUSTS,   POOLS   AND   CORPORATIONS 


at  an  increased  expense  of  thirty-eight  cents  per  box,  and  the 
market  price  down  to  $2.70  at  mill  for  first-class  plates.  The 
situation  is  indicated  by  the  accompanying  table  : 

WHOLESALE  PRICE  OF  TIN-PLATE  (BESSEMER  STEEL  1C  14  x  20,  IN  NEW  YORK 

PER   BOX    OF    100    LUS.)    AND    OF    STEEL    BlLLETS    (PER    LoNG   TON, 
AT    PlTTSBURG,    PA.)  l 


1  893 

STEEL  BILLETS    TIN-PLATES 

1896 

•  STEEL  BILLETS    TIN-PLATI 

July, 

$21.50-22.00 

35-05 

July, 

$18.25-20.25 

33-472 

August, 

21.00-21.25 

5.00 

August, 

-20.25 

3-50 

September, 

-20.50 

4.85 

September, 

-20.50 

3-50 

October, 

-18.50 

5.00 

October, 

-20.25 

3-5° 

November, 

17.50-18.00 

5.00 

November, 

-20.25 

3-65 

December, 

17.00-17.50 

4.90 

December, 

-20.25 

3-70 

1894 

1897 

January, 

-15.90 

4-87* 

January, 

-16.00 

3-75 

February, 

16.00-16.25 

4-85 

February, 

-15.50 

3.80 

March, 

-15.50 

4.85 

March, 

18.00-20.00 

3-75 

April, 

-'5-75 

4.80 

April, 

-15-25 

3.60 

May, 

16.75-17.00 

4-75 

May, 

-14-75 

3-70 

Tune, 

19.00-19.50 

4-75 

June, 

14-25-14.50 

3-7° 

July, 

-18.50 

4-72l 

July, 

14.00-14.25 

3-70 

August, 

17.00-17.25 

4-72! 

August, 

-14-25 

3-70 

September, 

-18.00 

4-772 

September, 

15.00-15.25 

3-70 

October, 

16.75-17.00 

3.85 

October, 

-16.50 

3-70 

November, 

-15-45 

3-75 

November, 

16.25-16.50 

3-90 

December, 

15.25-15.50 

3-65 

December, 

-15.00 

3-7° 

1895 

1898 

January, 

15.00-15.25 

3.60 

January, 

15.00-15.25 

3.80 

February, 

15.00-15.25 

3-571 

February, 

-15.00 

3-85 

March, 

15,00-15.25 

3-5° 

March, 

15-25-15-50 

3-85 

April, 

15.25-15.60 

3-5° 

April, 

i5-50-J5-75 

3-85 

May, 

I5-50-I5-75 

3-54 

May, 

15.00-15.25 

3-85 

June, 

17.75-18.00 

3-52} 

June, 

-i  ;.°° 

3-85 

July, 

20.50-20.75 

3-65 

July, 

-14-75 

3-85 

August, 

21.50-22.00 

3-75 

August, 

-M-75 

3.85 

September, 

- 

3-65 

September, 

-16.25 

3-95 

October, 

24.00-24.25 

3-65 

October, 

-16.00 

3-95 

November, 

21.00-21.50 

3-65 

November, 

15-5° 

3-95 

December, 

18.00-18.50 

3.60 

December, 

15.75-16.00 

3-95 

1896 

January, 

16.00-16.25 

3.60 

January, 

16.50-16.75 

2.92^ 

February, 

18.25-18.50 

3.52}-       ,     February, 

-17.25 

3-25 

March, 

-17.00 

3.45             March, 

2  1.  OO-22.OO 

3-7° 

April, 

-20.00 

3.42^            April, 

25.00-26.00 

3-91 

May, 

-20.25 

3-47  i 

May, 

-26.50 

3-972 

June, 

-20.25 

3-47^ 

1  Monthly  Summary  of  Finance  and  Commerce  of  the  United  States,  December. 
1897,  PP-  885,  889;  April,  1890,  pp.  2434,  2437.  2441,  2445.  (Quotations  taken  at  the 
beginning  of  each  month. 


THE  TIN-PLATE    INDUSTRY  309 

It  is  not  difficult  to  understand  why  steel  billets  should  increase 
in  value.  The  great  demand  for  rails  and  steel  for  bridges  and 
buildings  under  the  reviving  industry  of  the  year  explains  fairly 
well  this  rise,  but  pig  tin  does  not  come  under  the  influence  of 
American  production.  The  probabilities  are  that  the  market  in 
this  material  has  been  cornered.  Such  a  feat  would  be  by  no 
means  difficult.  The  output  is  comparatively  small,  and  passes 
through  but  few  hands.  If  such  is  the  case,  the  next  year  will 
see  an  increased  output  and  the  correction  of  the  present  con- 
dition. In  this  relation  Tin  and  Ternc,  commenting  on  the 
situation,  says  the  advance  is  a  most  radical  one,  and  it  seems 
certain  that  if  the  tin-plate  manufacturing  business  in  the 
country  had  remained  in  control  of  the  individual  companies, 
many  would  have  been  forced  to  the  wall  in  the  effort  to  fill 
contracts.1 

It  will  be  seen  from  what  has  been  already  said  that  the  tin- 
plate  industry  was  in  far  from  a  healthy  condition.  Everything 
pointed  to  demoralization.  It  was  very  natural  that,  under  these 
conditions,  repeated  attempts  should  be  made  to  form  a  com- 
bination. The  wasteful  methods  that  had  characterized  the 
early  industry  had  been  largely  corrected,  and  in  their  place  had 
been  substituted  economies  so  sweeping  that  it  was  almost 
impossible  for  the  companies  to  get  to  a  lower  cost  basis  with- 
out consolidation.2 

II 

Early  in  1898  negotiations  were  begun  by  persons  interested 
in  the  tin-plate  industry  to  ascertain  if  it  were  possible  to  form 
a  company  that  should  control  the  plants  of  the  country.  A 
meeting  of  the  most  important  manufacturers  was  held  at  Pitts- 
burg  in  January  of  last  year.3  Many  representatives  of  the 
different  interests  were  there.  An  attempt  was  made  to  get 
options  on  the  various  plants  engaged  in  this  industry.  A 
number  of  the  concerns  thinking  the  time  opportune  to  place  a 
high  valuation  on  their  properties  did  so,  but  in  most  instances, 


3io  TRUSTS,   POOLS  AND   CORPORATIONS 

especially  in  those  cases  where  plates  had  been  sold  below  cost, 
the  owners  were  willing  to  be  a  party  to  a  reasonable  agreement. 
The  result  of  the  meeting  was  undoubtedly  a  step  toward  further 
organization.  Evidently  there  was  a  carefully  arranged  plan 
back  of  the  whole  movement  which  was  to  be  carried  out  on 
well-determined  lines.  This  conference  was  followed  by  a  com- 
mittee meeting  in  New  York  during  the  first  week  of  Febru- 
ary. Four  of  the  tin-plate  manufacturers  present  at  Pittsburg 
had  been  appointed  to  confer  with  the  jobbers  in  New  York 
city.  During  the  importing  period  the  "  Big  Four,"  consisting 
of  brokerage  firms  in  the  city  just  mentioned,  dominated  the 
business  of  tin-plate  jobbing.  The  object  of  the  committee  was 
to  deal  with  these  firms,  who  were  regarded  as  powerful  factors 
in  the  business.  It  was  expected  that  they  would  oppose  con- 
solidation, and  it  was  therefore  determined  that  firmness  should 
be  the  tactics  of  the  committee.  The  committee  made  the  fol- 
lowing proposition :  that  if  the  four  merchant  concerns  wished 
to  cooperate,  they  must  furnish  funds  necessary  to  meet  one- 
third  of  the  expense  of  consolidation.  To  this  proposition  the 
merchants  objected,  but  they  were  informed  that  the  consolida- 
tion would  go  on  even  if  they  did  not  take  advantage  of  the 
offer.  It  is  quite  evident,  from  the  arrangements  which  have 
been  made  for  the  sale  of  tin-plates  as  well  as  the  disappearance 
of  these  firms  from  the  market,  that  the  offer  was  not  accepted. 
The  attempt  was  to  unite  both  mill  owners  and  principal  dealers, 
but  in  the  event  of  failure  to  bring  together  the  mill  owners,  at 
least.  A  great  many  in  the  trade  were  exceedingly  sceptical  in 
regard  to  the  movement.  So  well,  however,  did  the  conditions 
in  the  market  aid  the  promoters  that  1899  saw  the  formation  of 
the  syndicate  and  the  purchase  of  thirty-nine  plants  controlling 
279  mills. 

The  final  goal  of  the  promoters  of  the  syndicate  (and  it  was 
constantly  insisted  that  the  movement  was  a  syndicate  move- 
ment rather  than  a  combination)  was  to  imitate  the  organization 
of  the  American  Steel  and  Wire  Company.  This  last  concern 
completed  its  organization  early  in  1898,  and  furnished  a  practi- 
cal example  for  the  tin-plate  promoters.  A  comparison  of  the 
two  combinations  is,  therefore,  more  than  usually  interesting. 


THE   TIN-PLATE    INDUSTRY  311 

COMPARISON 
AMERICAN"  STEEI.  AND  WIRK  CO.1  AMERICAN  TIN-I'LATE  CO.2 

Stock 

I.   Ca]>ital    stock    of   £90,000,000,    of  i.    Capital    stock,   $50,000,000  ;    $20,- 

vvhich  ^40,000,000  is  7  per  cent  cumula-       000,000  preferred  and  $30,000,000  com- 
tive  preferred  stock  anil  $50,000,000  com-       mon  stock.     The  preference  shares  bear 


mon  stock. 


7  per  cent  interest  cumulative. 


Dividends 

2.  Dividends     upon    preferred    stock  '        2.    In  the  event  of  liquidation  or  dis- 
shall  he  cumulative.     In   case    of  disso-  solution  of  the  corporation    the    holders 
lution    or    liquidation     the     holders    of  of   the    aforesaid    cumulative    preference 
preferred    stock   are   to   he   paid    in    full  shares  shall  he  paid  the  full  amount  with 
both  the  principal  and  accrued   dividend  accrued  dividends.     After  such  payments 
charges   before   any   amount    is   paid    to  the    remaining    assets   shall    be    divided 
the  holders  of  common  stock.  !    among  the  holders  of  the  other  shares. 

Capital 

3.  The  amount  of  capital  stock  with    '        3.    The  amount  of  capital  stock  with 


which     it    will     commence     business    is 
5250,000. 


which    it    will     commence     business 
Si  0,000. 


4.     (a}  To  manufacture  and  trade  in    j        4.    (,/)   To  manufacture   and  trade  in 

steel,   iron  and   other  metals  ;    to  make,  tin,  lerne,  block   plates,  steel  sheets,  and 

purchase   and   sell   manufactured   articles  all    like    or   kindred    products,    to    mine, 

made  partly  or  wholly  from  metals  of  any  manufacture,  prepare  for  market,  market 

kind  and  all   like  or  kindred   products  ;  and    sell    the   same,  and    any  articles   or 

to  acquire  and  dispose  of  rights  to  make  product   in  the  manufacture  or  composi- 

and   use  the    same  ;    to   make   and    pur-  tion  of  which   metal   is  a   factor  ;    includ- 

chase    and    sell    such    other   products   or  ing   the   acquisition   by  purchase,  mining, 

merchandise  as  may  be  conveniently  or  manufacture  or  otherwise  of  all  materials, 

advantageously   used   or  sold   in   connec-  supplies  and   other  articles   necessary  or 

tion  with  said  metals  and  business;    and  convenient    for    use    in    connection    with 

to  apply   for,   purchase   or   otherwise   ac-  and   in   earning   on    the   business  herein 

quire  and   hold,  own.  use,  operate,  sell.  mentioned,  or  any  part  thereof, 

ns-ign    or  otherwise    dispose   of   patents,  (/>)    In  addition  to  the  general   powers 

rights,  and   processes.  the  company  shall   al>o  have   the   follow- 

\  i> )   The  corporation  shall  have  power  ing  powers:   To  manufacture,  deal,  own, 

to    purchase,    //.'/./.     /r/nif/rr,     in^rf^a^-',  si  11,     transfer,     etc..     goods,    wares     and 
//,••, .\re  tif  cther'i'ist-  ,//.>yV.>Y  of  the  shares    '    proper'  v  c  f  every  description   and   to   do 

!/  ViY''1  <>/."  <>r  anv  /\'ndf,  .Y-  mining  of   any  kind.     To   also   own   and 

ideiices  p/'iiideliteditess  created  dispose  of  real  estate  in  any  part    of  the 

i\'i-f,'ratii>n  or  ,  eryV/'./Avy/.?  \\orld   to  any  amount.      To  acquire  good 

liny    other    st, i tt\    and   'chile  will  and  rights  and  pmpertv  i  f  any  kind 

n<h    >tcck    in,iv    exerfist-    <i!l  and  f<>   mia'- i-.'axc  /'!'<•  :^'i  .'-.'  t>r  air.  part 


312 


TRUSTS,   POOLS  AND   CORPORATIONS 


AMERICAN   STEEL  AND   WIRE  CO. 


AMERICAN   TIN-PLATE  CO. 


Object 


rights,  powers  and  privileges  of  owner- 
ship including  right  to  vole.  The  cor- 
poration shall  have  the  power  to  establish 
offices  in  this  and  other  states  and  may 
hold  or  transfer  any  real  or  personal 
property  in  this  and  other  countries. 


of  the  assets  and  liabilities  of  any  person, 
firm,  association  or  corporation,  and  to 
pay  for  the  same  in  cash,  stocks  of  this 
corporation,  bonds  or  otherwise.  To  also 
apply  for,  hold,  own,  dispose  of  patents, 
processes,  licenses  and  trade  marks,  etc. 

To  make  contracts  with  any  individual 
firm,  association,  corporation,  and  with 
the  government  of  the  United  States, 
state  or  colony.  To  do  all  and  every- 
thing necessary  to  promote  the  interests 
of  shareholders  whether  manufacturing, 
mining  or  otherwise. 


Directors 


5.  Directors  shall  be  divided  into 
three  classes,  equal  in  number,  in  re-, 
spect  to  the  time  for  which  they  shall 
severally  hold  office.  The  first  for  three 
years,  the  second  two  years,  third  one 
year.  Office  shall  be  fur  three  years 
thereafter. 

With  the  assent  in  writing  or  pursuant 
to  the  vote  of  holders  of  two-thirds  of  the 
capital  sto.k,  the  directors  shall  have 
power  to  sell,  assign  or  transfer,  convey 
or  otherwise  dispose  of  the  property  and 
assets  of  this  corporation  as  the  directors 
may  see  lit. 

The  power  to  make  and  alter  the  by- 
laws shall  remain  \\ith  the  directors. 
The  directors  shall  have  power  to  hold 
their  meetings  wherever  may  be  desig- 
nated by  them.  The  accounts  of  the 
corporation  are  only  open  to  stock- 
holders upon  conditions  determined  by 
the  directors. 


5.  Directors  shall  be  divided  into  five 
classes.  The  first  class  being  elected  for 
five  years,  the  second,  fuur  years,  etc.,  so 
that  the  term  of  office  shall  be  live  years 
thereafter.  The  board  shall  fill  vacancies 
in  the  board.  Shall  have  the  power  to 
make  and  alter  by-laws. 

With  the  assent  in  writing  and  pursuant 
to  the  vote  of  holders  of  two-thirds  of  all 
sto.k  irrespective  of  class,  directors  shall 
have  th_-  power  to  sell,  assign  and  trans- 
fer, convey  or  otherwise  dispose  of  the 
property  and  assets  of  this  corporation 
as  the  directors  may  see  fit. 

An  executive  committee  consisting  of 
five  members  shall  have  the  power  to 
conduct  the  business  when  the  directors 
are  not  in  session.  Officers  of  the  com- 
mittee shall  be  a  chairman,  vice-president 
and  a  secretary.  They  shall  be  elected 
by  all  the  stockholders.  The  term  of 
office  shall  be  coextensive  with  the  office 
of  director.  Members  of  the  committee 
shall  not  be  subject  to  removal  for  any 
cau->e  bv  the  board  of  directors,  and  shall 
hold  otnce  until  their  successors  are 
elected.  Xo  stockholder  shall  have  the 
right  to  inspect  any  account,  book,  or 
document  of  the  corporation  except  as 
conferred  by  statutes  of  Xew  Jersey  or 
authori/ed  bv  the  directors. 


THE  TIN-PLATE   INDUSTRY  313 

The  thing  that  impresses  the  reader  of  the  comparison  made 
above  is  similarity  of  organization,  the  broad  features  of  the 
charters,  and  the  general  and  undetailed  character  of  the  pro- 
visions. In  section  four  it  will  be  noticed  that  the  intention  of 
the  framers  is  to  give  the  corporations  the  power  of  control 
over  all  properties  bought  in  any  manner,  whether  from  individ- 
ual, firm,  or  corporation,  and  that  in  the  case  of  the  American 
Steel  Wire  and  Rod  Co.  the  right  to  vote  acquired  by  the  pur- 
chase of  such  properties  remains  with  the  board  of  directors. 
There  is  nothing  in  the  provisions  of  the  two  charters  which 
would  make  it  impossible  for  either  one  to  incorporate  the  other 
and  form  one  great  concern.  Whether  the  logic  of  combination 
will  lead  to  such  a  result  is  difficult  to  say. 

Let  us  turn  now  to  some  of  the  more  salient  features  of  the 
American  Tin-Plate  Company's  charter.  First,  the  stock.  The 
amount  of  this  is  fifty  millions  of  dollars,  twenty  millions  of 
which  is  preferred  and  thirty  millions  common.  It  has  been 
determined  that  two  millions  of  each  are  to  remain  in  the  treas- 
ury, while  but  eighteen  millions  of  each  are  to  be  issued,  leaving 
ten  millions  for  the  promoters.1  There  is  a  further  provision 
that  for  each  subscription  of  one  hundred  dollars  of  preferred 
stock  one  hundred  dollars  of  common  stock  is  given  to  the  sub- 
scriber.2 On  March  27  the  preferred  stock  of  this  company 
was  selling  for  95  and  the  common  was  quoted  at  42.  This 
means  that  the  promoters  have  received  something  over  four 
millions  for  their  work.  The  total  capitalization  of  all  the  tin- 
plate  firms  in  the  United  States  was  estimated,  before  the 
formation  of  the  company,  at  between  three  and  five  millions  of 
dollars.3  Even  granting  that  it  was  ten  millions,  which  is  un- 
doubtedly too  high  an  estimate,  the  excessive  capitalization  of 
the  syndicate  means  watered  stock  on  the  face  of  it.  If  it  is 
possible  for  the  syndicate  to  carry  such  a  load,  there  is  always 
the  danger  of  competition,  failure  to  pay  dividends,  especially 
on  the  common  stock,  and  as  a  consequence  great  losses  to  the 
innocent  purchasers  of  common  stock.  The  syndicate  thus 


314  TRUSTS,   POOLS  AND   CORPORATIONS 

begins  its  business  operations  hampered  by  excessive  obliga- 
tions and  immediate  prospect  of  competition,  unless  effective 
means  are  taken  to  prevent  it. 

In  the  organization  of  this  company  a  distinction  is  to  be 
made  between  it  and  the  usual  trust.  The  provisions  of  trustee- 
ship are  altogether  absent,  so  that  the  legal  restrictions  upon 
trusts  may  be  avoided.  This  is  true  so  far  as  the  letter  of  the 
law  is  concerned,  but  in  the  actual  working  of  the  company  the 
executive  committee  provided  for  by  the  charter  is  in  almost 
every  sense  the  equivalent  of  the  trustees  in  a  trust.  This  body 
is  elected  by  the  stockholders  and  the  members  of  it  cannot  be 
removed  by  the  board  of  directors.  It  undoubtedly  goes  with- 
out saying  that  this  committee  will  control  the  business  of  the 
company.  The  stockholders  have  no  right  "  to  examine  or 
inspect  the  accounts,  books,  or  documents  of  the  corporation, 
except  as  conferred  by  the  statutes  of  New  Jersey  or  authorized 
by  the  directors."  This,  of  course,  means  just  as  absolute  a 
control  of  the  affairs  of  the  company  as  though  the  organization 
were  a  trust  in  letter  as  well  as  in  actual  fact.  It  is  also  to  be 
noticed  that  the  usual  freedom  of  the  directors  is  made  a  promi- 
nent part  of  the  charter.  It  is  only  by  a  two-thirds  vote  that 
the  stockholders  can  order  the  sale,  assignment,  or  transfer  of 
any  of  the  assets  of  the  company  and  then  only  as  the  directors 
see  fit.  The  holders  of  the  stock  of  the  local  companies  have 
exchanged  it,  or  sold  it,  and  then  bought  the  general  shares  of 
the  American  Tin-Plate  Company.  The  promoters  of  the  com- 
bination do  not  give  the  owners  of  the  different  plants  any 
option  in  the  disposition  of  their  stock;  it  is  sell  or  shut  up 
your  works.  The  movement  is,  therefore,  in  reality  a  complete 
trust  in  all  respects,  except  the  one  which  gives  to  the  holders 
of  stock  the  right  to  vote  on  the  disposition  of  the  stock  by  the 
directors. 

We  now  turn  to  the  policy  of  the  company. 

Ill 

In  considering  the  policy  of  the  syndicate  the  following 
points  suggest  themselves  for  treatment:  (i)  relation  to  the  tin- 


THE   TIN-PLATE    INDUSTRY  315 

plate  plants  of  the  combination,  (2)  dividends,  (3)  attitude 
toward  the  trade,  (4)  machinery  firms,  (5)  various  economies, 
(6)  wages.  It  is  exceedingly  difficult  to  get  detailed  informa- 
tion concerning  the  inner  working  of  the  combination,  but 
sufficient  is  indicated  here  to  show  in  a  general  way  what  the 
trend  of  the  movement  is. 

1.  At  the  present  time  a  number  of    the  plants  have  been 
closed  down.1     Among  these  are  some  of  the  largest  and  best 
equipped  mills  in  the  country.     The  company  now  owns  every 
tin-plate  plant  in  the  United  States  making  a  product  for  the 
general    trade.      Just    how    long   these    establishments    are    to 
remain  closed  is  impossible  to  say,  but  undoubtedly  the  com- 
pany is  trying  to  find  out  to  just  what  extent  it  is  necessary  to 
operate  the   different   plants  to   supply  the    demand.      If    it   is 
discovered  that  all    or  nearly  all   are    necessary,  two    lines    of 
policy  are  open  to  the  directors  :  first,  to  operate  all   the  mills 
owned  by  the  company;  second,  to  close  the  more  poorly  equipped 
and  badly  situated  mills  and  to  increase  the  producing  power 
of  the  better  plants.      It  is  more  than  likely  that  the  second, 
or  at- least  a  modification  of  it,  will  be  followed,  as  is  indicated 
to   some   degree   by  the   contracts    of    the    syndicate   with    the 
equipment  firms. 

2.  It  is  continually  asserted  that  the  American  Tin-Plate  Co. 
will2  be  able  to  pay  dividends  from  the  start  not  only  on  the 
preferred  stock,  but  on  the  common  stock  as  well.     This  divi- 
dend, it  is  said,  will  be  declared  on  April   i  to  at  least  i1,   per 
cent.3    The  company  has  only  been  in  existence  since  December. 
1898,  and  although  large  orders  have  undoubtedly  been  given 
to  the  company,   nevertheless  the  prices  of   tin-plate  have  not 
advanced  sufficiently  to  pay  the  increased  cost  of  steel  and  tin 
in  production.4      If  this  is  so,  it  is  not  likely  that  any  dividends 
will    be    paid   on   common    stock    for   some    time,    although    in 
some  instances  the  combine  bought  the  material  on  hand  at  the 

1   Tin  niitf  7't-rnc,  Feb.  2$,  1890. 

-  //•/«/..  Feb.  o,  iX'io.  *  Statement  made  in  F'-bn'.arv,  iS'VX 

4  This  means  <>n  S.jn.ooo.ooo  of  capital  51.4.20,000,  including  preferred  dividends. 

Add  tn  this  or<_;,nii/ation  expenses,  operation  and  ma;  .-rial,  and   the  difficulty  of  such 

a  course  is  at  once  apparent. 


316  TRUSTS,   POOLS  AND   CORPORATIONS 

various  mills  at  cost.1  This  will  give  a  larger  margin.  There 
is,  of  course,  the  temptation  constantly  before  such  a  concern 
to  pay  dividends  out  of  capital  stock  in  order  to  push  up  the 
quotation  of  common  stock.  But  the  whole  attitude  of  the 
company  seems  to  be  that  of  a  legitimate  manufacturing  enter- 
prise rather  than  a  speculative  movement.  Taken  all  in  all, 
the  company  is  not  likely  to  force  the  payment  of  dividends 
before  it  earns  them. 

3.  In  relation  to  the  trade,  a  radical  change  has  been  insti- 
tuted.    The  company  has  laid  down  the  principle  that  it  will 
not  have   any  dealings  with  brokers  in  tin-plate.2     The   idea 
upon  which  this  policy  is  based  is  that  with  but  one  producing 
company  of  tin-plate  there  is  no  need  of  a  broker.     The  com- 
pany makes  no  quotation  except  on  request  and  in  carload  lots. 
The  territory  is  divided  into  two  districts :  the  eastern  section 
with  headquarters  at  New  York,  and  the  western  division  with 
headquarters  at   Chicago.     The  Alleghany  Mountains  are  the 
dividing  line.     Two  men  have  been  appointed  as  general  agents 
over  these  divisiohs.     The  sales  part  of  the  business  will  be 
independent  of  the  other  parts,  the  management  of  the. mills 
having  no  jurisdiction  over  the  general  agents.3     The  price  of 
$3.00  has  been  fixed  for  carload  lots  of  100  lb.  boxes  of  coke 
plates  at  the  mill.     Business  involving  less  than  a  carload  is 
turned  over  to  the  jobber  nearest  to  the  customer.     All  quota- 
tions will  be  f.  o.  b.,  New  York,  Chicago,  or  destination,  so  that 
there  will  probably  be    some  advance  on  the  quotation   given 
above.     The  increasing  price  of  raw  material  will  also  change 
from  time  to  time  the  quotation  of  $3.00  f.  o.  b.  at  mills.4 

4.  Arrangements    have    been    made  with    nearly  every  firm 
in    the    land    engaged    in    manufacturing    machinery    for    tin- 
plate    plants,    to    sell    their    entire    product    to    the    American 
Tin-Plate    Co.      Any  combination    always  brings  a  lot  of   pro- 
moters into   existence  who    expect  to  build    plants  and    force 
the  combination  to  buy  them  at  a  fancy  price.     This  the  new 
company  expects  to  forestall  by  arranging  with  the  equipment 
firms  to  take  their  entire  output.      It  is  said  that  an  agreement 

1  Tin  and  Ternt,  Feb.  9,  1899.      3  Iron  Ag>,  Jan.  19,  1899. 

2  //'/</.,  Jan.  26,  1899.  4  Tin  and  Terue,  Feb.  9,  1899. 


THE   TIN-PLATE    INDUSTRY  317 

has  been  made  between  the  two  parties  for  five  years  ending 
January  i,  1904. 1  Just  what  and  how  much  this  product  is 
to  be  is  determined  by  the  tin-plate  company,  and  the  managing 
committee  distribute  the  machinery  secured  under  this  agree- 
ment among  the  different  plants  as  it  sees  fit.  The  prices  paid 
for  machinery  are  lower  than  if  equipments  were  bought  in  the 
open  market.  There  will  also  be  an  attempt  made  to  get  the 
machinery  firms  to  specialize,  so  that  each  will  be  a  producer 
of  a  certain  kind  of  machinery.  It  will  thus  be  all  but  impos- 
sible to  start  a  new.  mill  to  produce  such  machinery.  If, 
however,  there  is  any  special  demand  because  of  the  attitude 
of  the  company,  it  may  be  assumed  that  machine  companies 
in  other  lines  will  enter  the  field  as  makers  of  tin-plate  equip- 
ment. The  whole  arrangement,  nevertheless,  is  indicative  of 
the  shrewd  and  not  to  be  defeated  attitude  of  this  new  combi- 
nation. 

5.  In  addition  to  the  savings  already  pointed  out  the 
company  has  instituted  various  other  economies  of  some 
importance.  It  is  usually  the  custom  upon  the  organization 
of  a  big  concern  like  the  tin-plate  combination  to  give  enor- 
mous salaries.  This  the  directors  and  promoters  have  abso- 
lutely refused  to  do.  The  compensation  will  be  fair,  but  not 
high.  The  Tin  and  Tcrnc  says  in  regard  to  this  point,  "  We 
have  it  on  good  authority  that  the  salaries  paid  the  officers  of 
the  new  concern  will  be  very  low."2  The  number  of  officers 
will  also  be  cut  down  to  the  smallest  number  possible. 

The  company,  in  quoting  prices  f.  o.  b.  from  New  York  and 
Chicago,  and  shipping  to  the  purchaser  from  the  nearest  mill, 
will  be  in  a  position  to  save  some  very  considerable  amounts  in 
the  course  of  a  year  on  freight  rates.  \Yhether  it  will  secure 
any  concessions  from  the  railroads  in  freight  rates  is  not  known. 
Until  the  rate  between  Pittsburg  and  Chicago  is  very  consid- 
erably reduced,  the  company  will  have  to  face  the  Knglish 
competition  on  the  Pacific  coast.  The  rate  on  one  hundred 
pounds  from  Wales  to  San  Francisco  is  18  cents,  from  Pitts- 
burg  to  the  same  city  6i{  cents.3  The  Knglish  tin-plates  were 


318  TRUSTS,   POOLS  AND   CORPORATIONS 

selling  in  December  at  $2.30  per  box  of  100  Ibs.  at  Liverpool.1 
It  is  therefore  possible  for  the  English  companies  to  deliver 
plates  at  San  Francisco,  tariff  paid,  for  S4-io.  The  present  cost 
to  the  tin-plate  company  is  some  three  or  four  cents  above  this 
when  the  price  quoted  is  $3.50.  This  means  that  English  and 
American  plates  will  be  somewhat  on  an  equality  in  their 
competition  on  the  Pacific  coast.  Undoubtedly,  if  there  is  a 
sufficient  incentive,  the  railroads  will  reduce  the  rate,  and  make 
it  possible  to  go  under  the  English  price. 

The  company  is  too  new  to  show  how  much  of  a  saving 
may  be  effected  by  the  new  management.  Probably  greater 
uniformity  and  closer  attention  to  cutting  and  waste  will  produce 
some  economies. 

6.  The  question  of  wages  is  one  of  the  difficult  things  with 
which  the  new  company  has  to  deal.  The  tendency  is  in  the 
direction  of  a  considerable  increase  in  wages  in  all  the  steel 
industries.  The  advance  in  the  selling  price  of  tin-plate  has 
stimulated  the  officers  of  the  Amalgamated  Association  to  ask 
for  a  higher  scale  of  wages.  "Previous  to  July  I,  1896,  the 
base  wages  were  to  be  paid  as  long  as  the  selling  price  of  tin- 
plate  was  not  more  than  one-fourth  the  selling  price  of  a  ton 
of  steel  billets  ;  since  then  the  ratio  has  been  one-fifth."2  The 
company  is  in  a  peculiar  position  in  the  matter  of  wages. 
According  to  the  agreement  above,  the  company  must  pay 
higher  wages  if  the  ratio  between  steel  and  tin  increased.  This 
has  changed.  Tin-plates  have  increased  in  price  on  account  of 
the  added  cost  of  pig  tin,  and  because  of  this  addition  the  market 
quotation  has  risen  and  the  company  must  pay  more  wages. 
"  With  the  rapidly  advancing  prices  of  sheet  iron,  there  is  a 
possibility  that  an  advance  may  be  called  for  in  the  wages  of 
the  sheet  mill  men  also.  The  Amalgamated  Association  places 
an  arbitrary  limit  upon  the  output,  so  that  the  increased 
machinery  equipment  does  not  bring  a  proportional  benefit  to 
the  manufacturer.3  The  company  is,  therefore,  encountering 
high  prices  in  raw  material  (steel  and  pig  tin)  and  in  wages." 
It  is  questionable  whether  the  economies  spoken  of  above  will 


THE   TIN-PLATE    INDUSTRY  319 

any  more  than  make  up  for  these  extra  expenses.  The 
economic  strength  of  the  company  will  enable  it  to  meet  these 
difficulties  without  any  great  trouble. 

IV 

The  tin-plate  combination  is  an  arbitrary  but  natural  attempt 
to  raise  the  price  of  that  product.  It  is  interesting  to  note 
to  just  what  extent  the  combination  is  due  to  the  tariff.  In  the 
first  section  of  our  study  reference  was  made  to  the  repeal  of 
the  tariff  as  one  of  the  possible  ways  of  injuring  the  industry. 
Without  the  protection  now  afforded  to  tin-plate  through  the 
Dingley  Bill  it  would  be  impossible  for  the  industry  to  exist. 
The  tariff,  however,  did  not  directly  create  the  combination. 
Under  the  protection  afforded  since  1890  many  plants  came 
into  existence,  competing  with  one  another  until  the  price  was 
unduly  lowered.  Then  came  efforts  to  organize  a  great 
syndicate,  which  were  successful.  In  consequence  of  that 
organization,  the  price  of  tin-plate  has  been  increased,  and  a 
monopoly  over  the  production  of  it  secured  through  the  policy 
of  the  company  in  relation  to  dealers  and  machine  makers. 
The  consumer  is  thus  forced  to  pay  for  not  only  the  main- 
tenance of  the  industry,  but  also  the  profits  of  the  company. 
The  English  makers  are  shut  out  of  the  market  and  the  com- 
bination thus  completely  controls  the  production  of  the  com- 
modity inside  of  the  country.  So  long  as  the  tariff  remains  at 
a  protective  figure,  it  is  likely  that  the  syndicate  will  be  able  to 
stop  any  effort  to  renew  the  competition. 

Another  factor  bids  well  to  enter  the  problem  which  has 
probably  been  overlooked  in  the  calculations  of  the  syndicate 
managers.  That  is  the  repeal  of  the  tariff  duties.  In  the  last 
few  months  several  of  the  more  prominent  papers  representing 
the  political  party  that  established  the  tariff  on  tin-plate  have 
commented  editorially  on  the  necessity  of  that  party  taking  up 
the  question  of  monopolies.1  Severally  these  papers  have 
reached  a  common  solution.  Their  editors  have  come  to 
regard  the  tariff  as  responsible  tor  trusts  and,  therefore,  the 


320  TRUSTS,   POOLS  AND   CORPORATIONS 

repeal  of  such  legislation  the  direct  and  effective  way  of  dealing 
with  them.  It  is  not  necessary  to  consider  any  arguments  for 
or  against  the  above  supposition.  But  any  such  attitude  to 
the  extent  of  legislation  threatens  the  existence  both  of  the 
tin-plate  syndicate  and  the  industry.  It  would  be  impossible 
for  the  American  syndicate  to  withstand  the  renewal  of  English 
imports.  Two  movements  might  result  from  such  a  policy 
on  the  part  of  Congress  :  first,  to  break  the  syndicate  into  many 
parts,  the  individual  companies  claiming  that  they  were  no 
longer  a  party  to  the  monopoly  agreement,  but  were  still  in 
need  of  the  protection ;  second,  for  the  present  company  to 
unite  with  the  English  firms  in  an  effort  to  form  an  international 
combination.  This  would  be  the  more  natural  step  to  take, 
but  at  the  same  time  the  more  difficult  one  to  accomplish. 
The  popular  demand  and  the  hostile  attitude  of  the  people 
toward  large  capitalistic  concerns  will  undoubtedly  cause  the 
party  to  very  seriously  consider  the  movement  spoken  of  above. 
The  possibility  of  such  an  attitude  will  impress  itself  on  all 
thinking  men. 

On  the  other  hand,  another  movement,  other  than  political, 
can  be  seen  in  the  iron  and  steel  industries.  Within  the  last 
two  years  a  number  of  concerns  have  entered  combinations 
so  that  to-day  instead  of  there  being  many  companies  engaged 
in  allied  lines  of  industry,  there  are  several  combinations  cor- 
responding to  the  several  lines  of  production.  A  very  large 
part  of  the  iron  and  steel  product  is  controlled  by  seven  cor- 
porations.1 A  reference  to  the  respective  charters  of  the 
American  Tin-Plate  and  American  Steel  and  Wire  companies, 
is  sufficient  to  indicate  that  the  union  of  combinations  with 
combinations  is  by  no  means  impossible.  There  is  one  limita- 
tion upon  such  a  movement  and  that  is  the  inability  of  men 
to  manage  a  concern  economically  that  has  a  capital  and  out- 
put beyond  a  certain  amount.  Until  that  point  is  reached, 
combination  will  probably  continue,  and  it  is  possible  that  we 
may  see  an  attempt  to  unite  all  of  the  iron  and  steel  industries 


THE  TIN-PLATE    INDUSTRY  321 

under  one  management.  As  has  already  been  pointed  out, 
there  is  nothing  in  the  charters  of  the  two  concerns  compared 
in  the  second  section  of  this  article  to  prevent  union.  The  pro- 
visions are  so  wide  that  the  manufacture  of  steel  wires  and  rods 
could  be  carried  on  by  the  tin-plate  company  or  the  production 
of  tin-plate  by  the  steel  wire  and  rod  company.  It  would  be 
natural  that  the  two  should  unite,  or  the  entire  steel  industry 
might  possibly  come  under  the  control  of  one  gigantic  com- 
bination. 

The  industry  of  our  study  thus  stands  in  two  dangers  :  first, 
of  possibly  placing  prices  so  high  that  it  will  be  impossible 
to  maintain  them,  leading  to  a  virtual  revolt  on  the  part  of 
consumers  ;  and  second,  the  political  movement  culminating  in 
the  possible  withdrawal  of  the  tariff.  If  the  consumers  of  tin 
become  dissatisfied  with  the  attitude  of  the  company  in  the 
matter  of  prices,  the  political  movement  may  be  reenforced  by 
their  opposition  to  the  combination. 

The  American  Tin-Plate  Company  has  existed  less  than  six 
months,  so  that  the  developments  possible  to  the  future  are 
necessarily  conjectural.  Strong  as  the  company  is  in  its  organi- 
zation, it  is  particularly  vulnerable  from  the  political  movement 
mentioned  above. 

FRANK  L.  McVi-v. 
UNIVERSITY  UF  MINNESOTA. 


XIV 

THE    NORTHERN    SECURITIES    COMPANY1 

MR.  JUSTICE  HARLAN  announced  the  affirmance  of  the 
decree  of  the  circuit  court,  and  delivered  the  following 
opinion  : 

This  suit  was  brought  by  the  United  States  against  the  North- 
ern Securities  Company,  a  corporation  of  New  Jersey  ;  the  Great 
Northern  Railway  Company,  a  corporation  of  Minnesota;  the 
Northern  Pacific  Railway  Company,  a  corporation  of  Wisconsin  ; 
James  J.  Hill,  a  citizen  of  Minnesota;  and  others. 

Its  general  object  was  to  enforce,  as  against  the  defendants, 
the  provisions  of  the  statute  of  July  2,  1890,  commonly  known 
as  the  Anti-Trust  Act,  and  entitled  "An  Act  to  Protect  Trade 
and  Commerce  Against  Unlawful  Restraints  and  Monopolies." 
26  Stat.  at  L.,  209,  chap.  647,  U.  S.  Comp.  Stat.  1901,  page  3200. 
By  the  decree  below  the  United  States  was  given  substantially 
the  relief  asked  by  it  in  the  bill. 

As  the  act  is  not  very  long,  and  as  the  determination  of  the 
particular  questions  arising  in  this  case  may  require  a  considera- 
tion of  the  scope  and  meaning  of  most  of  its  provisions,  it  is 
here  given  in  full : 

§  i.  Every  contract,  combination  in  the  form  of  trust  or  otherwise, 
or  conspiracy,  in  restraint  of  trade  or  commerce  among  the  several 
states,  or  with  foreign  nations,  is  hereby  declared  to  be  illegal.  Every 
person  who  shall  make  any  such  contract,  or  engage  in  any  such  com- 

1  Abridged  from  the  text  of  the  decision.  Supreme  Court  of  the  United  States, 
Xo.  277,  October  Term,  1905,  Xorthern  Securities  Company,  etc.,  v.  Tlie  United 
States,  March  14.  i<,O3. 

An  excellent  history  of  the  case  is  given  in  outline  by  Professor  B.  H. 
Meyer,  in  the  Raihi'dV  Age.  March  18.  1903.  to  be  published  in  more  extended 
monographic  form  shortly.  A  bibliography  of  the  subject  is  also  appended  to 
A  List  of  Books  relating  to  Railroads,  published  by  the  Library  of  Congress. 
1904.  —  ED. 

322 


THE   NORTHERN    SECURITIES   COMPANY  323 

bination  or  conspiracy,  shall  be  deemed  guilty  of  a  misdemeanor,  and, 
on  conviction  thereof,  shall  be  punished  by  fine  not  exceeding  five  thou- 
sand dollars,  or  by  imprisonment  not  exceeding  one  year,  or  by  both 
said  punishments,  in  the  discretion  of  the  court. 

§  2.  Every  person  who  shall  monopolize,  or  attempt  to  monopolize, 
or  combine  or  conspire  with  any  other  person  or  persons  to  monopolize, 
any  part  of  the  trade  or  commerce  among  the  several  states,  or  with 
foreign  nations,  shall  be  deemed  guilty  of  a  misdemeanor,  and,  on  con- 
viction thereof,  shall  be  punished  by  fine  not  exceeding  five  thousand 
dollars,  or  by  imprisonment  nut  exceeding  one  year,  or  by  both  said 
punishments,  in  the  discretion  of  the  court. 

§  3.  Every  contract,  combination  in  form  of  trust  or  otherwise,  or 
conspiracy,  in  restraint  of  trade  or  commerce  in  any  territory  of  the 
United  States  or  of  the  District  of  Columbia,  or  in  restraint  of  trade  or 
commerce  between  any  such  territory  and  another,  or  between  any  such 
territory  or  territories  and  any  state  or  states  or  the  District  of  Columbia, 
or  with  foreign  nations,  or  between  the  District  of  Columbia,  and  any 
state  or  states  or  foreign  nations,  is  hereby  declared  illegal.  Every  per- 
son who  shall  make  any  such  contract  or  engage  in  any  such  combina- 
tion or  conspiracy  shall  be  deemed  guilty  of  a  misdemeanor,  and,  on 
conviction  thereof,  shall  be  punished  by  fine  not  exceeding  five  thousand 
dollars,  or  by  imprisonment  not  exceeding  one  year,  or  by  both  said 
punishments,  in  the  discretion  of  the  court. 

§  4.  The  several  circuit  courts  of  the  United  States  are  hereby 
invested  with  jurisdiction  to  prevent  and  restrain  violations  of  this  act  ; 
and  it  shall  be  the  duty  of  the  several  district  attorneys  of  the  United 
States,  in  their  respective  districts,  under  the  direction  of  the  Attorney- 
Cieneral,  to  institute  proceedings  in  equity  to  prevent  and  restrain  such 
violations.  Such  proceedings  may  be  by  way  of  petition  setting  forth 
the  case  and  praying  that  such  violation  shall  be  enjoined  or  otherwise 
prohibited.  When  the  parties  complained  of  shall  have  been  duly  noti- 
fied of  such  petition  the  court  shall  proceed,  as  soon  as  may  be,  to  the 
hearing  and  determination  of  the  case  ;  and,  pending  such  petition,  and 
before  (mil  decree,  the  court  may  at  any  time  make  such  temporary 
restraining  order  or  prohibition  as  shall  be  deemed  just  in  the  premises. 

Jl  5.  Whenever  it  shall  appear  to  the  court  before  which  any  pro- 
ceeding under  section  four  of  this  act  may  be  pending,  that  the  ends  of 
justice  require  that  other  parties  should  be  brought  before  the  court,  the 
court  may  cause  them  to  be  summoned,  whether  they  reside  in  the  dis- 
trict in  which  the  court  is  held  or  not  :  and  subpoenas  to  that  end  may 
be  served  in  any  district  by  the  marshal  thereof. 


324  TRUSTS,   POOLS  AND   CORPORATIONS 

§  6.  Any  property  owned  under  any  contract  or  by  any  combina- 
tion, or  pursuant  to  any  conspiracy  (and  being  the  subject  thereof) 
mentioned  in  section  one  of  this  act,  and  being  in  the  course  of  trans- 
portation from  one  state  to  another,  or  to  a  foreign  country,  shall  be 
forfeited  to  the  United  States,  and  may  be  seized  and  condemned  by 
like  proceedings  as  those  provided  by  law  for  the  forfeiture,  seizure,  and 
condemnation  of  property  imported  into  the  United  States  contrary  to  law. 

§  7.  Any  person  who  shall  be  injured  in  his  business  or  property  by 
any  other  person  or  corporation  by  reason  of  anything  forbidden  or 
declared  to  be  unlawful  by  this  act  may  sue  therefor  in  any  circuit  court 
of  the  United  States  in  the  district  in  which  the  defendant  resides  or  is 
found,  without  respect  to  the  amount  in  controversy,  and  shall  recover 
threefold  the  damages  by  him  sustained,  and  the  costs  of  suit,  including 
a  reasonable  attorney's  fee. 

§  8.  That  the  word  "person"  or  "  persons,"  wherever  used  in  this 
act,  shall  be  deemed  to  include  corporations  and  associations  existing 
under  or  authorized  by  the  laws  of  either  the  United  States,  the  laws  of 
any  of  the  territories,  the  laws  of  any  state,  or  the  laws  of  any  foreign 
country. 

Is  the  case  as  presented  by  the  pleadings  and  the  evidence 
one  of  a  combination  or  a  conspiracy  in  restraint  of  trade  or 
commerce  among  the  states,  or  with  foreign  states?  Is  it  one 
in  which  the  defendants  are  properly  chargeable  with  monopo- 
lizing or  attempting  to  monopolize  any  part  of  such  trade  or  com- 
merce ?  Let  us  see  what  are  the  facts  disclosed  by  the  record. 

The  Great  Northern  Railway  Company  and  the  Northern 
Pacific  Raihvay  Company  owned,  controlled  and  operated  sepa- 
rate lines  of  railway,  — the  former  road  extending  from  Superior, 
and  from  Duluth  and  St.  Paul,  to  Everett,  Seattle  and  Portland, 
with  a  branch  line  to  Helena;  the  latter  extending  from  Ash- 
land, and  from  Duluth  and  St.  Paul,  to  Helena,  Spokane, 
Seattle,  Tacoma  and  Portland.  The  two  lines,  main  and 
branches,  about  9000  miles  in  length,  were  and  are  parallel  and 
competing  lines  across  the  continent  through  the  northern  tier 
of  states  between  the  Great  Lakes  and  the  Pacific,  and  the  two 
companies  were  engaged  in  active  competition  for  freight  and 
passenger  traffic,  each  road  connecting  at  its  respective  terminals 
with  lines  of  railway,  or  with  lake  and  river  steamers,  or  with 
sea-iroiny;  vessels. 


THE   NORTHERN   SECURITIES   COMPANY  325 

Prior  to  1893  the  Northern  Pacific  system  was  owned  or  con- 
trolled and  operated  by  the  Northern  Pacific  Railroad  Company, 
a  corporation  organized  under  certain  acts  and  resolutions  of 
Congress.  That  company  becoming  insolvent,  its  road  and 
property  passed  into  the  hands  of  receivers  appointed  by  courts 
of  the  United  States.  In  advance  of  foreclosure  and  sale  a 
majority  of  its  bondholders  made  an  arrangement  with  the 
Great  Northern  Railway  Company  for  a  virtual  consolidation 
of  the  two  systems,  and  for  giving  the  practical  control  of  the 
Northern  Pacific  to  the  Great  Northern.  That  was  the  arrange- 
ment declared  in  Pcarsall  \.  Great  Northern  R.  Co.  161  U.  S., 
646,  40  L.  ed.,  838,  1 6  Sup.  Ct.  Rep.,  705,  to  be  illegal 
under  the  statutes  of  Minnesota  which  forbade  any  railroad 
corporation,  or  the  purchasers  or  managers  of  any  corporation, 
to  consolidate  the  stock,  property  or  franchises  of  such  cor- 
poration, or  to  lease  or  purchase  the  works  or  franchises  of, 
or  in  any  way  control,  other  railroad  corporations  owning  or 
having  under  their  control  parallel  or  competing  lines.  Minn. 
Gen.  Laws,  1874,  chap.  29,  1881,  chap.  109. 

Early  in  1901  the  Great  Northern  and  Northern  Pacific  Rail- 
way Companies,  having  in  view  the  ultimate  placing  of  their 
two  systems  under  a  common  control,  united  in  the  purchase 
of  the  capital  stock  of  the  Chicago,  Burlington  &  Ouincy  Rail- 
way Company,  giving  in  payment,  upon  an  agreed  basis  of 
exchange,  the  joint  bonds  of  the  Great  Northern  and  Northern 
Pacific  Railway  Companies,  payable  in  twenty  years  from  date, 
with  interest  at  4  per  cent  per  annum.  In  this  manner  the 
two  purchasing  companies  became  the  owners  of  $107,000, coo 
of  the  Si  12,000.000  total  capital  stock  of  the  Chicago,  Burling- 
ton and  Ouincy  Railway  Company,  whose  lines  aggregated 
about  8000  miles,  and  extended  from  St.  Paul  to  Chicago,  and 
from  St.  Paul  and  Chicago  to  Ouincy,  Burlington,  DCS  Moines, 
St.  Louis,  Kansas  City,  St.  Joseph,  Omaha,  Lincoln.  Denver, 
Cheyenne  and  Billings,  where  it  connected  with  the  Northern 
Pacific  Railroad.  By  this  purchase  of  stock  the  Great  Northern 
and  Northern  Pacific  acquired  lull  control  ol  the  Chicago,  Bur- 
lington &  Ouincv  main  line  and  branches. 

Prior    to    November    13,    1901,  defendant    Hill    and    associate 


326  TRUSTS,   POOLS  AND   CORPORATIONS 

stockholders  of  the  Great  Northern  Railway  Company,  and 
defendant  Morgan  and  associate  stockholders  of  the  Northern 
Pacific  Railway  Company,  entered  into  a  combination  to  form, 
under  the  laws  of  New  Jersey,  a  Jiolding  corporation,  to  be 
called  the  Northern  Securities  Company,  with  a  capital  stock 
of  $400,000,000,  and  to  which  company,  in  exchange  for  its 
own  capital  stock  upon  a  certain  basis  and  at  a  certain  rate, 
was  to  be  turned  over  the  capital  stock,  or  a  controlling  interest 
in  the  capital  stock,  of  each  of  the  constituent  railway  com- 
panies, with  power  in  the  holding  corporation  to  vote  such 
stock  and  in  all  respects  to  act  as  the  owner  thereof,  and  to  do 
whatever  it  might  deem  necessary  in  aid  of  such  railway  com- 
panies or  to  enhance  the  value  of  their  stocks.  In  this  manner 
the  interests  of  individual  stockholders  in  the  property  and 
franchises  of  the  two  independent  and  competing  railway  com- 
panies were  to  be  converted  into  an  interest  in  the  property  and 
franchises  of  the  holding  corporation.  Thus,  "  by  making  the 
stockholders  of  each  system  jointly  interested  in  both  systems, 
and  by  practically  pooling  the  earnings  of  both  for  the  benefit 
of  the  former  stockholders  of  each,  and  by  vesting  the  selection 
of  the  directors  and  officers  of  each  system  in  a  common  body, 
to  wit,  the  holding  corporation,  with  not  only  the  power,  but  the 
duty,  to  pursue  a  policy  which  would  promote  the  interests,  not 
of  one  system  at  the  expense  of  the  other,  but  of  both  at  the 
expense  of  the  public,  all  inducement  for  competition  between 
the  two  systems  was  to  be  removed,  a  virtual  consolidation 
effected,  and  a  monopoly  of  the  interstate  and  foreign  com- 
merce formerly  carried  on  by  the  two  systems  as  independent 
competitors  established." 

In  pursuance  of  this  combination,  and  to  effect  its  objects,  the 
defendant,  the  Northern  Securities  Company,  was  organized 
November  13,  1901,  under  the  laws  of  New  Jersey. 

Its  certificate  of  incorporation  stated  that  the  objects  for  which 
the  company  was  formed  were  : 

i.  To  acquire  by  purchase,  subscription  or  otherwise,  and  to  hold 
as  investment,  any  bonds  or  other  securities  or  evidences  of  indebted- 
ness, or  any  shares  of  capital  stock  created  or  issued  by  any  other  corpo- 


THE    NORTHERN    SECURITIES   COMPANY  327 

ration'  or  corporations,  association  or  associations,  of  the  state  of  New 
Jersey,  or  of  any  other  state,  territory  or  country. 

2.  To   purchase,   hold,   sell,    assign,    transfer,    mortgage,    pledge    or 
otherwise  dispose  of  any  bonds  or  other  securities  or  evidences  of  in- 
debtedness created  or  issued  by  any  other  corporation  or  corporations, 
association  or  associations,  of  the  state  of  New  Jersey,  or  of  any  other 
state,  territory  or  country,  and  while  owner  thereof  to  exercise  all   the 
rights,  powers  and  privileges  of  ownership. 

3.  To   purchase,    hold,   sell,   assign,    transfer,    mortgage,    pledge    or 
otherwise  dispose  of  shares  of  the  capital  stock  of  any  other  corporation 
or  corporations,  association  or  associations,  of  the  state  of  New  Jersey, 
or  of  any  other  state,  territory  or   country,  and   while   owner   of   such 
stock  to   exercise  all   the  rights,  powers  and  privileges  of  ownership, 
including  the  right  to  vote  thereon. 

4.  To  aid  in  any  manner  any  corporation  or  association   of  which 
any  bonds  or  other  securities  or  evidences  of  indebtedness  or  stock  are 
held  by  the  corporation,  and  to  do  any  acts  or  things  designed  to  pro- 
tect, preserve,  improve  or  enhance  the  value  of  any  such  bonds  or  other 
securities  or  evidences  of  indebtedness  or  stock. 

5.  To  acquire,   own    and   hold   such   real  and  personal  property  as 
may  be  necessary  or  convenient  for  the  transaction  of  its  business. 

It  was  declared  in  the  certificate  that  the  business  or  purpose 
of  the  corporation  was  from  time  to  time  to  do  any  one  or  more 
of  such  acts  and  things,  and  that  the  corporation  should  have 
power  to  conduct  its  business  in  other  states  and  in  foreign 
countries,  and  to  have  one  or  more  offices,  and  hold,  purchase, 
mortgage  and  convey  real  and  personal  property  otit  of  New 
Jersey. 

The  total  authorized  capital  stock  of  the  corporation  was  fixed 
at  8400,000,000,  divided  into  4,000,000  shares  of  the  par  value 
of  Sioo  each.  The  amount  of  the  capital  stock  with  which  the 
corporation  should  commence  business  was  fixed  at  530,000. 
The  duration  of  the  corporation  was  to  be  perpetual. 

This  charter  having  been  obtained.  Hill  and  his  associate 
stockholders  of  the  Great  Northern  Railway  Company,  and  Mor- 
gan and  associate  stockholders  of  the  Northern  Pacific  Railway 
Company,  assigned  to  the  Securities  company  a  controlling 
amount  of  the  capital  stock  of  the  respective  constituent  com- 
panies upon  an  agreed  basis  of  exchange  of  the  capital  stock  of 


328  TRUSTS,   POOLS  AND   CORPORATIONS 

the  Securities  company  for  each  share  of  the  capital  stock  of  the 
other  companies. 

In  further  pursuance  of  the  combination,  the  Securities  com- 
pany acquired  additional  stock  of  the  defendant  railway  com- 
panies, issuing  in  lieu  thereof  its  own  stock  upon  the  above  basis, 
and,  at  the  time  of  the  bringing  of  this  suit,  held,  as  owner  and 
proprietor,  substantially  all  the  capital  stock  of  the  Northern 
Pacific  Railway  Company,  and,  it  is  alleged,  a  controlling  inter- 
est in  the  stock  of  the  Great  Northern  Railway  Company,  "and 
is  voting  the  same  and  is  collecting  the  dividends  thereon,  and 
in  all  respects  is  acting  as  the  owner  thereof,  in  the  organization, 
management  and  operation  of  said  railway  companies  and  in  the 
receipt  and  control  of  their  earnings." 

No  consideration  whatever,  the  bill  alleges,  has  existed  or  will 
exist,  for  the  transfer  of  the  stock  of  the  defendant  railway  com- 
panies to  the  Northern  Securities  Company,  other  than  the  issue 
of  the  stock  of  the  latter  company  for  the  purpose,  after  the 
manner,  and  upon  the  basis  stated. 

The  Securities  company,  the  bill  also  alleges,  was  not  organ- 
ized in  good  faith  to  purchase  and  pay  for  the  stocks  of  the 
Great  Northern  and  Northern  Pacific  Railway  Companies,  but 
solely  "to  incorporate  the  pooling  of  the  stocks  of  said  com- 
panies," and  carry  into  effect  the  above  combination;  that  it  is 
a  mere  depositary,  custodian,  holder  or  trustee  of  the  stocks  of 
the  Great  Northern  and  Northern  Pacific  Railway  Companies ; 
that  its  shares  of  stock  are  but  beneficial  certificates  against  said 
railroad  stocks  to  designate  the  interest  of  the  holders  in  the 
pool ;  that  it  does  not  have  and  never  had  any  capital  to  warrant 
such  an  operation  ;  that  its  subscribed  capital  was  but  $30.000, 
and  its  authorized  capital  stock  of  $400,000,000  was  just  suffi- 
cient, when  all  issued,  to  represent  and  cover  the  exchange  value 
of  substantially  the  entire  stock  of  the  Great  Northern  and 
Northern  Pacific  Railway  Companies,  upon  the  basis  and  at  the 
rate  agreed  upon,  which  was  about  $122,000,000  in  excess  of  the 
combined  capital  stock  of  the  two  railway  companies  taken  at 
par;  and  that,  unless  prevented,  the  Securities  company  would 
acquire,  as  owner  and  proprietor,  substantially  all  the  capital 
stock  of  the  Great  Northern  and  Northern  Pacific  Railway  Com- 


THE    NORTHERN    SECURITIES   COMPANY  329 

panics,  issuing  in  lieu  thereof  its  own  capital  stock  to  the  full 
extent  of  its  authorized  issue,  of  which,  upon  the  agreed  basis  of 
exchange,  the  former  stockholders  of  the  Great  Northern  Rail- 
way Company  have  received  or  would  receive  and  hold  about 
55  per  cent,  the  balance  going  to  the  former  stockholders  of  the 
Northern  Pacific  Railway  Company. 

The  government  charges  that  if  the  combination  was  held  not 
to  be  in  violation  of  the  act  of  Congress,  then  all  efforts  of  the 
national  government  to  preserve  to  the  people  the  benefits  of 
free  competition  among  carriers  engaged  in  interstate  commerce 
will  be  wholly  unavailing,  and  all  transcontinental  lines,  indeed, 
the  entire  railway  systems  of  the  country,  may  be  absorbed, 
merged  and  consolidated,  thus  placing  the  public  at  the  abso- 
lute mercy  of  the  holding  corporation. 

The  several  defendants  denied  all  the  allegations  of  the  bill 
imputing  to  them  a  purpose  to  evade  the  provisions  of  the  act  of 
Congress,  or  to  form  a  combination  or  conspiracy  having  for  its 
object  either  to  restrain  or  to  monopolize  commerce  or  trade 
among  the  states  or  with  foreign  nations.  They  denied  that  any 
combination  or  conspiracy  was  formed  in  violation  of  the  act. 

In  our  judgment,  the  evidence  fully  sustains  the  material  alle- 
gations of  the  bill,  and  shows  a  violation  of  the  act  of  Congress, 
in  so  far  as  it  declares  illegal  every  combination  or  conspiracy  in 
restraint  of  commerce  among  the  several  states  and  with  for- 
eign nations,  and  forbids  attempts  to  monopolize  such  com- 
merce or  any  part  of  it. 

Summarizing  the  principal  facts,  it  is  indisputable  upon  this 
record  that  under  the  leadership  of  the  defendants  1 1  ill  and 
Morgan,  the  stockholders  of  the  Great  Northern  and  Northern 
Pacific  Railway  corporations,  having  competing  and  substantially 
parallel  lines  from  the  Great  Lakes  and  the  Mississippi  River 
to  the  Pacific  Ocean  at  Puget  Sound,  combined  and  conceived 
the  scheme  of  organizing  a  corporation  under  the  laws  of  New 
Jersey  which  should  //<>///  the  shares  of  the  stock  of  the  constitu- 
ent companies  ;  such  shareholders,  in  lieu  of  their  shares  in  those 
companies,  to  receive,  upon  an  agreed  basis  of  value,  shares  in 
the  holding  corporation  ;  that  pursuant  to  such  combination  the 
Northern  Securities  Com  pan  v  was  organized  as  the  holding  cor- 


330  TRUSTS,   POOLS  AND   CORPORATIONS 

poration  through  which  the  scheme  should  be  executed;  and 
under  that  scheme  such  holding  corporation  has  become  the 
holder  —  more  properly  speaking,  the  custodian — of  more  than 
nine-tenths  of  the  stock  of  the  Northern  Pacific,  and  more  than 
three-fourths  of  the  stock  of  the  Great  Northern,  the  stock- 
holders of  the  companies  who  delivered  their  stock  receiving 
upon  the  agreed  basis  shares  of  stock  in  the  holding  corporation. 
The  stockholders  of  these  two  competing  companies  disappeared, 
as  such,  for  the  moment,  but  immediately  reappeared  as  stock- 
holders of  the  holding  company,  which  was  thereafter  to  guard 
the  interests  of  both  sets  of  stockholders  as  a  unit,  and  to  man- 
age, or  cause  to  be  managed,  both  lines  of  railroad  as  if  held  in 
one  oivncrsJiip.  Necessarily  by  this  combination  or  arrangement 
the  holding  company  in  the  fullest  sense  dominates  the  situation 
in  the  interest  of  those  who  were  stockholders  of  the  constituent 
companies ;  as  much  so,  for  every  practical  purpose,  as  if  it  had 
been  itself  a  railroad  corporation  which  had  built,  owned  and 
operated  both  lines  for  the  exclusive  benefit  of  its  stockholders. 
Necessarily,  also,  the  constituent  companies  ceased,  under  such 
a  combination,  to  be  in  active  competition  for  trade  and  com- 
merce along  their  respective  lines,  and  have  become,  practically, 
one  powerful  consolidated  corporation,  by  the  name  of  a  holding 
corporation,  the  principal,  if  not  the  sole,  object  for  the  forma- 
tion of  which  was  to  carry  out  the  purpose  of  the  original  com- 
bination, under  which  competition  between  the  constituent 
companies  would  cease.  Those  who  were  stockholders  of  the 
Great  Northern  and  Northern  Pacific  and  became  stockholders 
in  the  holding  company  are  now  interested  in  preventing  all 
competition  between  the  two  lines,  and,  as  owners  of  stock  or  of 
certificates  of  stock  in  the  holding  company,  they  will  see  to  it 
that  no  competition  is  tolerated.  They  will  take  care  that  no 
persons  are  chosen  directors  of  the  holding  company  who  will 
permit  competition  between  the  constituent  companies.  The 
result  of  the  combination  is  that  all  the  earnings  of  the  constitu- 
ent companies  make  a  common  fund  in  the  hands  of  the  North- 
ern Securities  Company,  to  be  distributed,  not  upon  the  basis  of 
the  earnings  of  the  respective  constituent  companies,  each  acting 
exclusively  in  its  own  interests,  but  upon  the  basis  of  the  certifi- 


THE    NORTHERN    SECURITIES   COMPANY  331 

cates  of  stock  issued  by  the  holding  company.  No  scheme  or 
device  could  more  certainly  come  within  the  words  of  the  act, — 
"  combination  in  the  form  of  a  trust  or  otherwise  ...  in  re- 
straint of  commerce  among  the  several  states  or  with  foreign 
nations,"  —  or  could  more  effectively  and  certainly  suppress  free 
competition  between  the  constituent  companies.  This  combina- 
tion is,  within  the  meaning  of  the  act,  a  "  trust " ;  but  if  not,  it 
is  a  combination  in  restraint  of  interstate  and  international  com- 
merce;  and  that  is  enough  to  bring  it  under  the  condemnation 
of  the  act.  The  mere  existence  of  such  a  combination,  and  the 
power  acquired  by  the  holding  company  as  its  trustee,  constitute 
a  menace  to,  and  a  restraint  upon,  that  freedom  of  commerce 
which  Congress  intended  to  recognize  and  protect,  and  which 
the  public  is  entitled  to  have  protected.  If  such  combination  be 
not  destroyed,  all  the  advantages  that  would  naturally  come  to 
the  public  under  the  operation  of  the  general  laws  of  competi- 
tion, as  between  the  Great  Northern  and  Northern  Pacific  Rail- 
way Companies,  will  be  lost,  and  the  entire  commerce  of  the 
immense  territory  in  the  northern  part  of  the  United  States  be- 
tween the  Great  Lakes  and  the  Pacific  at  Puget  Sound  will  be 
at  the  mercy  of  a  single  holding  corporation,  organized  in  a  state 
distant  from  the  people  of  that  territory. 

The  circuit  court  was  undoubtedly  right  when  it  said  —  all 
the  judges  of  that  court  concurring  —  that  the  combination  re- 
ferred to  "led  inevitably  to  the  following  results:  first,  it  placed 
the  control  of  the  two  roads  in  the  hands  of  a  single  person,  to 
wit,  the  Securities  Company,  by  virtue  of  its  ownership  of  a 
large  majority  of  the  stock  of  both  companies  ;  second,  it  de- 
stroys every  motive  for  competition  between  two  roads  engaged 
in  interstate  traffic,  which  were  natural  competitors  for  business, 
by  pooling  the  earnings  of  the  two  roads  for  the  common  bene- 
fit of  the  stockholders  of  both  companies."  I2O  Fed.,  721,  724. 

Such  being  the  case  made  by  the  record,  what  are  the  prin- 
ciples that  must  control  the  decision  of  the  present  case  ?  Do 
former  adjudications  determine  the  controlling  questions  raised 
by  the  pleadings  and  proofs  ? 

The  contention  of  the  government  is  that,  if  regard  be  had  to 
former  adjudications,  the  present  case  must  be  determined  in  its 


332  TRUSTS,   POOLS  AND   CORPORATIONS 

favor.  That  view  is  contested  and  the  defendants  insist  that  a 
decision  in  their  favor  will  not  be  inconsistent  with  anything 
heretofore  decided  and  would  be  in  harmony  with  the  act  of 
Congress. 

Is  the  act  to  be  construed  as  forbidding  every  combination  or 
conspiracy  in  restraint  of  trade  or  commerce  among  the  states 
or  with  foreign  nations  ?  Or,  does  it  embrace  only  such  re- 
straints as  are  unreasonable  in  their  nature  ?  Is  the  motive  with 
which  a  forbidden  combination  or  conspiracy  was  formed  at  all 
material  when  it  appears  that  the  necessary  tendency  of  the 
particular  combination  or  conspiracy  in  question  is  to  restrict  or 
suppress  free  competition  between  competing  railroads  engaged 
in  commerce  among  the  states  ?  Does  the  act  of  Congress  pre- 
scribe, as  a  rule  for  interstate  or  international  commerce,  that 
the  operation  of  the  natural  laws  of  competition  between  those 
engaged  in  such  commerce  shall  not  be  restricted  or  interfered 
with  by  any  contract,  combination  or  conspiracy?  How  far 
may  Congress  go  in  regulating  the  affairs  or  conduct  of  state 
corporations  engaged  as  carriers  in  commerce  among  the  states 
or  of  state  corporations  which,  although  not  directly  engaged 
themselves  in  such  commerce,  yet  have  control  of  the  business 
of  interstate  carriers  ?  If  state  corporations,  or  their  stockhold- 
ers, are  found  to  be  parties  to  a  combination  in  the  form  of  a 
trust  or  otherwise,  which  restrains  interstate  or  international 
commerce,  may  they  not  be  compelled  to  respect  any  rule  for 
such  commerce  that  may  be  lawfully  prescribed  by  Congress  ? 


We  will  not  encumber  this  opinion  by  extended  extracts  from 
the  former  opinions  of  this  court.  It  is  sufficient  to  say  that 
from  the  decisions  in  the  above  cases  certain  propositions  are 
plainly  deducible  and  embrace  the  present  case.  Those  propo- 
sitions are  : 

That  although  the  act  of  Congress  known  as  the  Anti-Trust  Act 
has  no  reference  to  the  mere  manufacture  or  production  of  arti- 
cles or  commodities  within  the  limits  of  the  several  states,  it 
does  embrace  and  declare  to  be  illegal  every  contract,  combina- 
tion or  conspiracy,  in  whatever  form,  of  whatever  nature,  and 


THE   NORTHERN    SECURITIES   COMPANY  333 

whoever  may  be  parties  to  it,  which  directly  or  necessarily 
operates  ///  restraint  of  trade  or  commerce  among  the  several 
states  or  with  foreign  nations  ; 

That  the  act  is  not  limited  to  restraints  of  interstate  and  inter- 
national trade  or  commerce  that  are  unreasonable  in  their  nature, 
but  embraces  all  direct  restraints  imposed  by  any  combination, 
conspiracy  or  monopoly  upon  such  trade  or  commerce ; 

That  railroad  carriers  engaged  in  interstate  or  international 
trade  or  commerce  are  embraced  by  the  act; 

That  combinations,  even  among //v'tvz/V  manufacturers  or  deal- 
ers, whereby  interstate  or  international  commerce  is  restrained,  are 
equally  embraced  by  the  act ; 

That  Congress  has  the  power  to  establish  rules  by  which  in- 
terstate and  international  commerce  shall  be  governed,  and,  by 
the  Anti-Trust  Act,  has  prescribed  the  rule  of  free  competition 
among  those  engaged  in  such  commerce; 

That  every  combination  or  conspiracy  which  would  extinguish 
competition  between  otherwise  competing  railroads  engaged  in 
interstate  trade  or  commerce,  and  which  would  in  that  way  re- 
strain sncli  trade  or  commerce,  is  made  illegal  by  the  act; 

That  the  natural  effect  of  competition  is  to  increase  com- 
merce, and  an  agreement  whose  direct  effect  is  to  prevent  this 
play  of  competition  restrains  instead  of  promoting  trade  and 
commerce  ; 

That  to  vitiate  a  combination  such  as  the  act  of  Congress 
condemns,  it  need  not  be  shown  that  the  combination,  in  fact, 
results  or  will  result,  in  a  total  suppression  of  trade  or  in  a  com- 
plete monopoly,  but  it  is  onlv  essential  to  show  that,  by  its  nec- 
essary operation,  it  tends  to  restrain  interstate  or  international 
trade  or  commerce  or  tends  to  create  a  monopoly  in  such  trade 
or  commerce  and  to  deprive  the  public  of  the  advantages  that 
ilow  from  tree  competition; 

That  the  constitutional  guaranty  of  liberty  of  contract  does  not 
prevent  Congress  from  prescribing  the  rule  of  free  competition 
for  those  engaged  in  interstate  and  international  commerce  ;  and, 

That  under  its  power  to  regulate  commerce  among  the  several 
states  and  with  foreign  nations,  Congress  had  authority  to  enact 
the  statute  in  question. 


334  TRUSTS,   POOLS  AND   CORPORATIONS 

No  one,  we  assume,  will  deny  that  these  propositions  were 
distinctly  announced  in  the  former  decisions  of  this  court.  They 
cannot  be  ignored  or  their  effect  avoided  by  the  intimation  that 
the  court  indulged  in  obiter  dicta.  What  was  said  in  those  cases 
was  within  the  limits  of  the  issues  made  by  the  parties.  In  our 
opinion,  the  recognition  of  the  principles  announced  in  former 
cases  must,  under  the  conceded  facts,  lead  to  an  affirmance  of 
the  decree  below,  unless  the  special  objections,  or  some  of  them, 
which  have  been  made  to  the  application  of  the  act  of  Congress 
to  the  present  case,  are  of  a  substantial  character.  We  will  now 
consider  those  objections. 

Underlying  the  argument  in  behalf  of  the  defendants  is  the 
idea  that,  as  the  Northern  Securities  Company  is  a  state  corpo- 
ration, and  as  its  acquisition  of  the  stock  of  the  Great  Northern 
and  Northern  Pacific  Railway  Companies  is  not  inconsistent  with 
the  powers  conferred  by  its  charter,  the  enforcement  of  the  act 
of  Congress,  as  against  those  corporations,  will  be  an  unauthor- 
ized interference  by  the  national  government  with  the  internal 
commerce  of  the  states  creating  those  corporations.  This  sug- 
gestion does  not  at  all  impress  us.  There  is  no  reason  to  sup- 
pose that  Congress  had  any  purpose  to  interfere  with  the  internal 
affairs  of  the  states,  nor,  in  our  opinion,  is  there  any  ground  what- 
ever for  the  contention  that  the  Anti-Trust  Act  regulates  their 
domestic  commerce.  By  its  very  terms  the  act  regulates  only 
commerce  among  the  states  and  with  foreign  states.  Viewed  in 
that  light,  the  act,  if  within  the  powers  of  Congress,  must  be 
respected;  for,  by  the  explicit  words  of  the  Constitution,  that 
instrument  and  the  laws  enacted  by  Congress  in  pursuance  of 
its  provisions,  are  the  supreme  law  of  the  land,  "anything  in  the 
constitution  or  laws  of  any  state  to  the  contrary  notwithstand- 
ing,"— -supreme  over  the  states,  over  the  courts  and  even  over 
the  people  of  the  United  States,  —  the  source  of  all  power  under 
our  governmental  system  in  respect  of  the  objects  for  which  the 
national  government  was  ordained.  An  act  of  Congress  consti- 
tutionally passed  under  its  power  to  regulate  commerce  among 
the  states  and  with  foreign  nations  is  binding  upon  all ;  as  much 
so  as  if  it  were  embodied,  in  terms,  in  the  Constitution  itself. 
Every  judicial  officer,  whether  of  a  national  or  a  state  court,  is 


THE   NORTHERN    SECURITIES   COMPANY  335 

under  the  obligations  of  an  oath  so  to  regard  a  lawful  enactment 
of  Congress.  Not  even  a  state,  still  less  one  of  its  artificial 
creatures,  can  stand  in  the  way  of  its  enforcement.  If  it  were 
otherwise,  the  government  and  its  laws  might  be  prostrated  at 
the  feet  of  local  authority.  CoJicn  v.  Virginia,  6  Wheat.,  264, 
385,  414,  5  L.  eel.,  257,  286,  293.  These  views  have  been  often 
expressed  by  this  court. 

It  is  said  that  whatever  may  be  the  power  of  a  state  over  such 
subjects,  Congress  cannot  forbid  single  individuals  from  dispos- 
ing of  their  stock  in  a  state  corporation,  even  if  such  corporation 
be  engaged  in  interstate  and  international  commerce ;  that  the 
holding  or  purchase  by  a  state  corporation,  or  the  purchase  by 
individuals,  of  the  stock  of  another  corporation,  for  whatever 
purpose,  are  matters  in  respect  of  which  Congress  has  no 
authority  under  the  Constitution  ;  that,  so  far  as  the  power  of 
Congress  is  concerned,  citizens,  or  state  corporations,  may  dis- 
pose of  their  property  and  invest  their  money  in  any  way  they 
choose ;  and  that  in  regard  to  all  such  matters,  citizens  and 
state  corporations  are  subject,  if  to  any  authority,  only  to  the 
lawful  authority  of  the  state  in  which  such  citizens  reside  or 
under  whose  laws  such  corporations  are  organized.  It  is  un- 
necessary in  this  case  to  consider  such  abstract,  general  ques- 
tions. The  court  need  not  now  concern  itself  with  them.  They 
are  not  here  to  be  examined  and  determined,  and  may  well  be 
left  for  consideration  in  some  case  necessarily  involving  their 
determination. 

In  this  connection,  it  is  suggested  that  the  contention  of  the 
government  is  that  the  acquisition  and  otvncrsJiip  of  stock  in 
a  slate  railroad  corporation  is  itself  interstate  commerce  if  that 
corporation  be  engaged  in  interstate  commerce.  This  sugges- 
tion is  made  in  different  ways ;  sometimes  in  express  words,  at 
other  times  by  implication.  For  instance,  it  is  said  that  the 
question  here  is  whether  the  power  of  Congress  over  interstate 
commerce  extends  to  the  regulation  of  the  ownership  of  the 
stock  in  state  railroad  companies,  by  reason  of  their  being  en- 
gaged in  such  commerce.  Again,  it  is  said  that  the  only  issue 
in  this  case  is  whether  the  Northern  Securities  Company  can 
acquire  and  hold  stock  in  other  state  corporations.  Still  further, 


336  TRUSTS,   POOLS  AND   CORPORATIONS 

it  is  asked,  generally, -whether  the  organization  or  ownership  of 
railroads  is  not  under  the  control  of  the  states  under  whose  laws 
they  came  into  existence?  Such  statements  as  to  the  issues  in 
this  case  are,  we  think,  wholly  unwarranted,  and  are  very  wide 
of  the  mark  ;  it  is  the  setting  up  of  mere  men  of  straw  to  be 
easily  stricken  down.  We  do  not  understand  that  the  govern- 
ment makes  any  such  contentions  or  takes  any  such  positions 
as  those  statements  imply.  It  does  not  contend  that  Congress 
may  control  the  mere  acquisition  or  the  mere  ownership  of  stock 
in  a  state  corporation  engaged  in  interstate  commerce.  Nor 
does  it  contend  that  Congress  can  control  the  organization  of 
state  corporations  authorized  by  their  charters  to  engage  in 
interstate  and  international  commerce.  But  it  does  contend 
that  Congress  may  protect  the  freedom  of  interstate  commerce 
by  any  means  that  are  appropriate  and  that  are  lawful,  and 
not  prohibited  by  the  Constitution.  It  does  contend  that  no 
state  corporation  can  stand  in  the  way  of  the  enforcement  of 
the  national  will,  legally  expressed.  What  the  government  par- 
ticularly complains  of  —  indeed,  all  that  it  complains  of  here  — 
is  the  existence  of  a  combination  among  the  stockholders  of 
competing  railroad  companies  which,  in  violation  of  the  act 
of  Congress,  restrains  interstate  and  international  commerce 
through  the  agency  of  a  common  corporate  trustee,  designated 
to  act  for  both  companies  in  repressing  free  competition  between 
them.  Independently  of  any  question  of  the  mere  ownership 
of  stock  or  of  the  organization  of  a  state  corporation,  can  it  in 
reason  be  said  that  such  a  combination  is  not  embraced  by  the 
very  terms  of  the  Anti-Trust  Act  ?  May  not  Congress  declare 
that  combination  to  be  illegal?  If  Congress  legislates  for  the 
protection  of  the  public,  may  it  not  proceed  on  the  ground  that 
wrongs,  when  effected  by  a  powerful  combination,  are  more 
dangerous  and  require  more  stringent  supervision  than  when 
they  are  to  be  effected  by  a  single  person  ?  Callan  v.  Wilson, 
127  U.  S.,  540,  556,  32  L.  ed.,  223,  228,  8  Sup.  Ct.  Rep.,  1301. 
How  far  may  the  courts  go  in  order  to  give  effect  to  the  act  of 
Congress,  and  remedy  the  evils  it  was  designed  by  that  act  to 
suppress  ?  These  are  confessedly  questions  of  great  moment, 
and  thev  will  now  be  considered. 


THE   NORTHERN   SECURITIES  COMPANY  337 

By  the  express  words  of  the  Constitution,  Congress  has  power 
to  "regulate  commerce  with  foreign  nations  and  among  the  sev- 
eral states,  and  with  the  Indian  tribes."  In  view  of  the  numerous 
decisions  of  this  court  there  ought  not,  at  this  day,  to  be  any 
doubt  as  to  the  general  scope  of  such  power. 


As  late  as  the  case  of  Re  Debs,  158  U.  S.,  564,  582,  39  L.  ed., 
1092,  1101,  15  Sup.  Ct.  Rep.,  900,  905,  this  court,  every  member 
of  it  concurring,  said:  "  The  entire  strength  of  the  nation  may 
be  used  to  enforce  in  any  part  of  the  land  the  full  and  free  exer- 
cise of  all  national  powers  and  the  security  of  all  rights  intrusted 
by  the  Constitution  to  its  care.  The  strong  arm  of  the  national 
government  may  be  put  forth  to  brush  away  all  obstructions  to 
the  freedom  of  interstate  commerce  or  the  transportation  of  the 
mails.  If  the  emergency  arises,  the  army  of  the  nation,  and  all 
its  militia,  are  at  the  service  of  the  nation  to  compel  obedience 
to  its  laws." 

The  means  employed  in  respect  of  the  combinations  forbid- 
den by  the  Anti-Trust  Act,  and  which  Congress  deemed  germane 
to  the  end  to  be  accomplished,  was  to  prescribe  as  a  rule  for 
interstate  and  international  commerce  (not  for  domestic  com- 
merce) that  it  should  not  be  vexed  by  combinations,  conspira- 
cies or  monopolies  which  restrain  commerce  by  destroying  or 
restricting  competition.  We  say  that  Congress  has  prescribed 
such  a  rule,  because,  in  all  the  prior  cases  in  this  court,  the 
Anti-Trust  Act  has  been  construed  as  forbidding  any  combina- 
tion which,  by  its  necessary  operation,  destroys  or  restricts  free 
competition  among  those  engaged  in  interstate  commerce  ;  in 
other  words,  that  to  destroy  or  restrict  free  competition  in  inter- 
state commerce  was  to  restrain  such  commerce.  Xo\v,  can  this 
court  say  that  such  a  rule  is  prohibited  by  the  Constitution  or  is 
not  one  that  Congress  could  appropriately  prescribe  when  exert- 
ing its  power  under  the  commerce  clause  of  the  Constitution  ? 
Whether  the  free  operation  of  the  normal  laws  of  competition 
is  a  wise  and  wholesome  rule  for  trade  and  commerce  is  an 
economic  question  which  this  court  need  not  consider  or  deter- 
mine. Undoubtedly,  there  are  those  who  think  that  the  general 


338  TRUSTS,   POOLS  AND   CORPORATIONS 

business  interests  and  prosperity  of  the  country  will  be  best 
promoted  if  the  rule  of  competition  is  not  applied.  But  there 
are  others  who  believe  that  such  a  rule  is  more  necessary  in 
these  days  of  enormous  wealth  than  it  ever  was  in  any  former 
period  of  our  history.  Be  all  this  as  it  may,  Congress  has,  in 
effect,  recognized  the  rule  of  free  competition  by  declaring 
illegal  every  combination  or  conspiracy  in  restraint  of  interstate 
and  international  commerce.  As,  in  the  judgment  of  Congress, 
the  public  convenience  and  the  general  welfare  will  be  best 
subserved  when  the  natural  laws  of  competition  are  left  undis- 
turbed by  those  engaged  in  interstate  commerce,  and  as  Con- 
gress has  embodied  that  rule  in  a  statute,  that  must  be,  for  all, 
the  end  of  the  matter,  if  this  is  to  remain  a  government  of  laws, 
and  not  of  men. 

It  is  said  that  railroad  corporations  created  under  the  laws  of 
a  state  can  only  be  consolidated  with  the  authority  of  the  state. 
Why  that  suggestion  is  made  in  this  case  we  cannot  under- 
stand, for  there  is  no  pretence  that  the  combination  here  in 
question  was  under  the  authority  of  the  states  under  whose 
laws  these  railroad  corporations  were  created.  But  even  if  the 
state  allowed  consolidation,  it  would  not  follow  that  the  stock- 
holders of  two  or  more  state  railroad  corporations,  having  com- 
peting lines  and  engaged  in  interstate  commerce,  could  lawfully 
combine  and  form  a  distinct  corporation  to  hold  the  stock  of  the 
constituent  corporations,  and,  by  destroying  competition  between 
them,  in  violation  of  the  act  of  Congress,  restrain  commerce 
among  the  states  and  with  foreign  nations. 

The  rule  of  competition,  prescribed  by  Congress,  was  not  at  all 
new  in  trade  and  commerce.  And  we  cannot  be  in  any  doubt 
as  to  the  reason  that  moved  Congress  to  the  incorporation  of 
that  rule  into  a  statute.  That  reason  was  thus  stated  in  United 
States  v.  Joint  Traffic  Asso.:  "  Has  not  Congress,  with  regard 
to  interstate  commerce,  and  in  the  course  of  regulating  it, 
in  the  case  of  railroad  corporations,  the  power  to  say  that  no 
contract  or  combination  shall  be  legal  which  shall  restrain  trade 
and  commerce  by  shutting  out  the  operation  of  the  general  law 
of  competition  ?  \Ye  think  it  has.  ...  It  is  the  combination  of 
these  large  and  powerful  corporations,  covering  vast  sections 


THE   NORTHERN    SECURITIES   COMPANY  339 

of  territory  and  influencing  trade  throughout  the  whole  extent 
thereof,  and  acting  as  one  body  in  all  the  matters  over  which 
the  combination  extends,  that  constitutes  the  alleged  evil,  and 
in  regard  to  which,  so  far  as  the  combination  operates  upon  and 
restrains  interstate  commerce,  Congress  has  power  to  legislate  and 
to  prohibit."  Pages  569,  571,  L.  ed.,  pages  287,  2SS,  Sup.  Ct. 
Rep.,  page  32.  That  such  a  rule  was  applied  to  interstate  com- 
merce should  not  have  surprised  any  one.  Indeed,  when  Congress 
declared  contracts,  combinations  and  conspiracies  in  restraint 
of  trade  or  commerce  to  be  illegal,  it  did  nothing  more  than 
apply  to  interstate  commerce  a  rule  that  had  been  long  applied 
by  the  several  states  when  dealing  with  combinations  that  were 
in  restraint  of  their  domestic  commerce.  The  decisions  in  state 
courts  upon  this  general  subject  are  not  only  numerous  and 
instructive,  but  they  show  the  circumstances  under  which  the 
Anti-Trust  Act  was  passed.  It  may  well  be  assumed  that  Con- 
gress, when  enacting  that  statute,  shared  the  general  appre- 
hension that  a  few  powerful  corporations  or  combinations 
sought  to  obtain,  and,  unless  restrained,  would  obtain,  such 
absolute  control  of  the  entire  trade  and  commerce  of  the  coun- 
try as  would  be  detrimental  to  the  general  welfare. 

In  Morris  Run  Coal  Co.  \.  Barclay  Coal  Co.,  68  Pa., 
173,  1 86,  the  supreme  court  of  Pennsylvania  dealt  with  a 
combination  of  coal  companies  seeking  the  control,  within  a 
large  territory,  of  the  entire  market  for  bituminous  coal.  The 
court,  observing  that  the  combination  was  wide  in  its  scope, 
general  in  its  influence,  and  injurious  in  its  effects,  said  : 
"  When  competition  is  left  free,  individual  error  or  folly  will 
generally  find  a  correction  in  the  conduct  of  others.  But  here 
is  a  combination  of  all  the  companies  operating  in  the  Bloss- 
burg  and  Barclay  mining  regions,  and  controlling  their  entire 
productions.  They  have  combined  together  to  govern  the 
supply  and  the  price  of  coal  in  all  the  markets  from  the  Hud- 
son to  the  Mississippi  rivers,  and  from  Pennsylvania  to  the 
Lakes.  This  combination  has  a  power  in  its  confederated  torm 
which  no  individual  action  can  confer.  The  public  interest 
must  succumb  to  it,  for  it  has  lett  no  competition  free  to  correct 
its  baleful  influence.  When  the  supply  of  coal  is  suspended  the 


340  TRUSTS,   POOLS  AND   CORPORATIONS 

demand  for  it  becomes  importunate,  and  prices  must  rise.  Or 
if  the  supply  goes  forward,  the  price  fixed  by  the  confederates 
must  accompany  it.  The  domestic  hearth,  the  furnaces  of  the 
iron  master  and  the  fires  of  the  manufacturer  all  feel  the 
restraint,  while  many  dependent  hands  are  paralyzed  and  hun- 
gry mouths  are  stinted.  The  influence  of  a  lack  of  supply  or  a 
rise  in  the  price  of  an  article  of  such  prime  necessity  cannot  be 
measured.  It  permeates  the  entire  mass  of  the  community,  and 
leaves  few  of  its  members  untouched  by  its  withering  blight. 
Such  a  combination  is  more  than  a  contract ;  it  is  an  offence. 
...  In  all  such  combinations  where  the  purpose  is  injurious 
or  unlawful,  the  gist  of  the  offence  is  the  conspiracy.  Men 
can  often  do  by  the  combination  of  many  what,  severally,  no 
one  could  accomplish,  and  even  what,  when  done  by  one,  would 
be  innocent.  .  .  .  There  is  a  potency  in  numbers  zu/ien  combined 
which  the  law  cannot  overlook,  where  injury  is  the  conse- 
quence." The  same  principles  were  applied  in  Arnot  v.  Pitt- 
ston  &  E.  Coal  Co.,  68  N.  Y.,  558,  565,  23  Am.  Rep.,  190,  194, 
which  was  the  case  of  a  combination  of  two  coal  companies  in 
order  to  give  one  of  them  a  monopoly  of  coal  in  a  particular 
region,  the  court  of  appeals  of  New  York  holding  that  "a  com- 
bination to  effect  such  a  purpose  is  inimical  to  the  interests  of 
the  public,  and  that  all  contracts  designed  to  effect  such  an  end 
are  contrary  to  public  policy,  and  therefore  illegal."  They 
were  also  applied  by  the  supreme  court  of  Ohio  in  Central  Ohio 
Salt  Co.  v.  Gut/trie,  35  Ohio  St.,  666,  6/2,  which  was  the  case 
of  a  combination  among  manufacturers  of  salt  in  a  large  salt-pro- 
ducing territory,  the  court  saying:  "  It  is  no  answer  to  say  that 
competition  in  the  salt  trade  was  not  in  fact  destroyed,  or  that  the 
price  of  the  commodity  was  not  unreasonably  advanced.  Courts 
will  not  stop  to  inquire  as  to  tJic  degree  of  injury  inflicted  upon 
the  public ;  it  is  cnougJi  to  know  that  tJie  inevitable  tendency  of 
sucJi  contracts  is  injurious  to  tlic  public." 

So,  in  Craft  v.  McCojiougJiy,  79  111.,  346,  350,  22  Am.  Rep., 
171,  ]  74,  which  was  the  case  of  a  combination  among  grain 
dealers  by  which  competition  was  stifled,  the  court  saying:  "  So 
long  as  competition  was  free,  the  interest  of  the  public  was  safe. 
The  laws  of  trade,  in  connection  with  the  rigor  of  competition, 


THE   NORTHERN    SECURITIES   COMPANY  341 

was  all  the  guaranty  the  public  required ;  but  the  secret  com- 
bination created  by  the  contract  destroyed  all  competition,  and 
created  a  monopoly  against  which  the  public  interest  had  no 
protection."  Again,  in  People  ex  rcl.  Peabody  v.  Chicago  Gas 
Trust  Co.,  130  111.,  269,  297,  8  L.  R.  A.,  497,  506,  22  N.  E.,  798, 
804,  which  involved  the  validity  of  the  organization  of  a  gas 
corporation  which  obtained  a  monopoly  in  the  business  of  fur- 
nishing illuminating  gas  in  the  city  of  Chicago  by  buying  the 
stock  of  four  other  gas  companies,  it  was  said  :  "  Of  what  avail 
is  it  that  any  number  of  gas  companies  may  be  formed  under 
the  general  incorporation  law,  if  a  giant  trust  company  can  be 
clothed  with  the  power  of  buying  up  and  holding  the  stock  and 
property  of  such  companies,  and,  through  the  control  thereby 
attained,  can  direct  all  their  operations  and  weld  them  into 
one  huge  combination?"  To  the  same  effect  are  cases  almost 
too  numerous  to  be  cited.  But  among  them  we  refer  to  Rich- 
ardson v.  Buhl,  77  Mich.,  632,  6  L.  R.  A. ,457,  43  N.  W.,  1102, 
which  was  the  case  of  the  organization  of  a  corporation  in 
Connecticut  to  unite  in  one  corporation  all  the  match  manu- 
facturers in  the  United  States,  and  thus  to  obtain  control  of  the 
business  of  manufacturing  matches  ;  Santa  Clara  Valley  Mill 
&  Lumber  Co.  v.  Hayes,  76  Cal.,  387,  390,  18  Pac.,  391,  which 
was  the  case  of  a  combination  among  manufacturers  of  lum- 
ber, by  which  it  could  control  the  business  in  certain  localities  ; 
and  India  Bagging  Asso.  v.  Kock,  14  La.  Ann.,  164,  which  was 
the  case  of  a  combination  among  various  commercial  firms  to 
control  the  prices  of  bagging  used  by  cotton  planters. 

The  cases  just  cited,  it  is  true,  relate  to  the  domestic  com- 
merce of  the  states.  But  they  serve  to  show  the  authority 
which  the  states  possess  to  guard  the  public  against  combina- 
tions that  repress  individual  enterprise  and  interfere  with  the 
operation  of  the  natural  laws  of  competition  among  those 
engaged  in  trade  within  its  limits.  They  serve  also  to  give 
point  to  the  declaration  of  this  court  in  Gibbons  \.  Ogdcn,  9 
Wheat.  107,  6  L.  ed.,  70, — a  principle  never  modified  by  any 
subsequent  decision, — that,  subject  to  the  limitations  imposed 
by  the  Constitution  upon  the  exercise  of  the  powers  granted  by 
that  instrument,  "the  power  over  commerce  with  foreign  nations 


342  TRUSTS,   POOLS  AND   CORPORATIONS 

and  among  the  several  states  is  vested  in  Congress  as  absolutely 
as  it  would  be  in  a  single  government  having  in  its  constitution 
the  same  restrictions  on  the  exercise  of  the  power  as  are  found 
in  the  Constitution  of  the  United  States."  Is  there,  then,  any 
escape  from  the  conclusion  that,  subject  only  to  such  restrictions, 
the  power  of  Congress  over  interstate  and  international  com- 
merce is  as  full  and  complete  as  is  the  power  of  any  state  over 
its  domestic  commerce  ?  If  a  state  may  strike  down  combinations 
that  restrain  its  domestic  commerce  by  destroying  free  com- 
petition among  those  engaged  in  such  commerce,  what  power, 
except  that  of  Congress,  is  competent  to  protect  the  freedom  of 
interstate  and  international  commerce  when  assailed  by  a  com- 
bination that  restrains  such  commerce  by  stifling  competition 
among  those  engaged  in  it  ? 

Now,  the  court  is  asked  to  adjudge  that,  if  held  to  embrace  the 
case  before  us,  the  Anti-Trust  Act  is  repugnant  to  the  Constitu- 
tion of  the  United  States.  In  this  view  we  are  unable  to  concur. 
The  contention  of  the  defendants  could  not  be  sustained  without, 
in  effect,  overruling  the  prior  decisions  of  this  court  as  to  the 
scope  and  validity  of  the  Anti-Trust  Act.  If,  as  the  court  has 
held,  Congress  can  strike  down  a  combination  between  private 
persons  or  private  corporations  that  restrains  trade  among  the 
states  in  iron  pipe  (as  in  Addyston  Pipe  &  Steel  Co.  v.  United 
Stiit'-s)  or  in  tiles,  grates  and  mantels  (as  in  W.  \V.  Montague 
&  Co.  v.  Loiurj'),  surely  it  ought  not  to  be  doubted  that  Con- 
gress has  power  to  declare  illegal  a  combination  that  restrains 
commerce  among  the  states,  and  with  foreign  nations,  as  carried 
on  over  the  lines  of  competing  railroad  companies  exercising 
public  franchises,  and  engaged  in  such  commerce.  We  cannot 
agree  that  Congress  may  strike  clown  combinations  among 
manufacturers  and  dealers  in  iron  pipe,  tiles,  grates  and  man- 
tels that  restrain  commerce  among  the  states  in  such  articles, 
but  may  not  strike  down  combinations  among  stockholders  of 
competing  railroad  carriers,  which  restrain  commerce  as  involved 
in  the  transportation  of  passengers  and  property  among  the  sev- 
eral states.  If  private  parties  may  not,  by  combination  among 
themselves,  restrain  interstate  and  international  commerce  in 
violation  of  an  act  of  Congress,  much  less  can  such  restraint  be 


THE    NORTHERN    SECURITIES   COMPANY  343 

tolerated  when  imposed,  or  attempted  to  be  imposed,  upon  com- 
merce as  carried  on  over  public  highways.  Indeed,  if  the  con- 
tentions of  the  defendants  are  sound,  why  may  not<7//the  railway 
companies  in  the  United  States,  that  are  engaged,  under 
state  charters,  in  interstate  and  international  commerce,  enter 
into  a  combination  such  as  the  one  here  in  question,  and,  by  the 
device  of  a  holding  corporation,  obtain  the  absolute  control 
throughout  the  entire  country  of  rates  for  passengers  and 
freight,  beyond  the  power  of  Congress  to  protect  the  public 
against  their  exactions  ?  The  argument  in  behalf  of  the  de- 
fendants necessarily  leads  to  such  results,  and  places  Congress, 
although  invested  by  the  people  of  the  United  States  with  full 
authority  to  regulate  interstate  and  international  commerce,  in 
a  condition  of  utter  helplessness,  so  far  as  the  protection  of  the 
public  against  such  combinations  is  concerned. 

Will  it  be  said  that  Congress  can  meet  such  emergencies  by 
prescribing  the  rates  by  which  interstate  carriers  shall  be  gov- 
erned in  the  transportation  of  freight  and  passengers  ?  If  Con- 
gress has  the  power  to  fix  such  rates  —  and  upon  that  question 
we  express  no  opinion  —  it  does  not  choose  to  exercise  its  power 
in  that  way  or  to  that  extent.  It  has,  all  will  agree,  a  large  dis- 
cretion as  to  the  means  to  be  employed  in  the  exercise  of  any 
power  granted  to  it.  For  the  present,  it  has  determined  to  go 
no  farther  than  to  protect  the  freedom  of  commerce  among  the 
states  and  with  foreign  states  by  declaring  illegal  all  contracts, 
combinations,  conspiracies  or  monopolies  in  restraint  of  such 
commerce,  and  make  it  a  public  offence  to  violate  the  rule  thus 
prescribed.  Mow  much  further  it  may  go,  we  do  not  now  say. 
\Ve  need  only  at  this  time  consider  whether  it  has  exceeded  its 
powers  in  enacting  the  statute  here  in  question. 

Assuming,  without  further  discussion,  that  the  case  before  us 
is  within  the  terms  of  the  act,  and  that  the  act  is  not  in  excess 
of  the  powers  of  Congress,  we  recur  to  the  question,  How  far 
may  the  courts  go  in  reaching  and  suppressing  the  combination 
described  in  the  bill?  All  will  agree  that  if  the  Anti-Trust 
Act  be  constitutional,  and  it  the  combination  in  question  be  in 
violation  of  its  provisions,  the  courts  may  enforce  the  provisions 
of  the  statute  bv  such  orders  and  decrees  as  are  necessarv  or 


344  TRUSTS,   POOLS  AND   CORPORATIONS 

appropriate  to  that  end  and  as  may  be  consistent  with  the  funda- 
mental rules  of  legal  procedure.  And  all,  we  take  it,  will  agree, 
as  established  firmly  by  the  decisions  of  this  court,  that  the 
power  of  Congress  over  commerce  extends  to  all  the  instrumentali- 
ties of  such  commerce,  and  to  every  device  that  many  be  employed 
to  interfere  with  the  freedom  of  commerce  among  the  states  and 
with  foreign  nations.  Equally,  we  assume,  all  will  agree  that 
the  Constitution  and  the  legal  enactments  of  Congress  are,  by 
express  words  of  the  Constitution,  the  supreme  law  of  the  land, 
anything  in  the  constitution  and  laws  of  any  state  to  the  con- 
trary notwithstanding.  Nevertheless,  the  defendants,  strangely 
enough,  invoke  in  their  behalf  the  loth  Amendment  of  the  Con- 
stitution, which  declares  that  "  the  powers  not  delegated  to  the 
United  States  by  the  Constitution,  nor  prohibited  by  it  to  the 
states,  are  reserved  to  the  states  respectively  or  to  the  people  " ; 
and  we  are  confronted  with  the  suggestion  that  any  order  or 
decree  of  the  Federal  court  which  will  prevent  the  Northern 
Securities  Company  from  exercising  the  power  it  acquired  in 
becoming  the  holder  of  the  stocks  of  the  Great  Northern  and 
Northern  Pacific  Railway  Companies  will  be  an  invasion  of  the 
rights  of  the  state  under  which  the  Securities  company  was 
chartered,  as  well  as  of  the  rights  of  the  states  creating  the  other 
companies.  In  other  words,  if  the  state  of  New  Jersey  gives  a 
charter  to  a  corporation,  and  even  if  the  obtaining  of  such  char- 
ter is  in  fact  pursuant  to  a  combination  under  which  it  becomes 
the  holder  of  the  stocks  of  shareholders  in  two  competing, 
parallel  railroad  companies  engaged  in  interstate  commerce  in 
other  states,  whereby  competition  between  the  respective  roads 
of  those  companies  is  to  be  destroyed  and  the  enormous  commerce 
carried  on  over  them  restrained  by  suppressing  competition, 
Congress  must  stay  its  hands  and  allow  such  restraint  to  con- 
tinue, to  the  detriment  of  the  public,  because,  forsooth,  the  cor- 
porations concerned  or  some  of  them  are  state  corporations. 
We  cannot  conceive  how  it  is  possible  for  any  one  to  seriously  con- 
tend for  such  a  proposition.  It  means  nothing  less  than  that  Con- 
gress, in  regulating  interstate  commerce,  must  act  in  subordination 
to  the  will  of  the  states  when  exerting  their  power  to  create 
corporations.  No  such  view  can  be  entertained  for  a  moment. 


THE    NORTHERN    SECURITIES   COMPANY  345 

It  is  proper  to  say  in  passing  that  nothing  in  the  record  tends 
to  show  that  the  state  of  New  Jersey  had  any  reason  to  suspect 
that  those  who  took  advantage  of  its  liberal  incorporation  laws 
had  in  view,  when  organizing  the  Securities  company,  to  destroy 
competition  between  two  great  railway  carriers  engaged  in  in- 
terstate commerce  in  distant  states  of  the  Union.  The  purpose 
of  the  combination  was  concealed  under  very  general  words  that 
gave  no  clew  whatever  to  the  real  purposes  of  those  who  brought 
about  the  organization  of  the  Securities  company.  If  the  cer- 
tificate of  incorporation  of  that  company  had  expressly  stated 
that  the  object  of  the  company  was  to  destroy  competition  be- 
tween competing,  parallel  lines  of  interstate  carriers,  all  would 
have  seen,  at  the  outset,  that  the  scheme  was  in  hostility  to  the 
national  authority,  and  that  there  was  a  purpose  to  violate  or 
evade  the  act  of  Congress. 

We  reject  any  such  view  of  the  relations  of  the  national 
government  and  the  states  composing  the  Union  as  that  for 
which  the  defendants  contend.  Such  a  view  cannot  be  main- 
tained without  destroying  the  just  authority  of  the  United  States. 
It  is  inconsistent  with  all  the  decisions  of  this  court  as  to  the 
powers  of  the  national  government  over  matters  committed  to 
it.  No  state  can,  by  merely  creating  a  corporation,  or  in  any 
other  mode,  project  its  authority  into  other  states,  and  across  the 
continent,  so  as  to  prevent  Congress  from  exerting  the  power 
it  possesses  under  the  Constitution  over  interstate  and  inter- 
national commerce,  or  so  as  to  exempt  its  corporation  engaged 
in  interstate  commerce  from  obedience  to  any  rule  lawfully  es- 
tablished by  Congress  for  such  commerce.  It  cannot  be  said 
that  any  state  may  give  a  corporation,  created  under  its  laws, 
authority  to  restrain  interstate  or  international  commerce  against 
the  will  of  the  nation  as  lawfully  expressed  by  Congress.  Every 
corporation  created  by  a  state  is  necessarily  subject  to  the  su- 
preme law  of  the  land.  And  yet  the  suggestion  is  made  that 
to  restrain  a  state  corporation  from  interfering  with  the  free 
course  of  trade  and  commerce  among  the  states,  in  violation  ot 
an  act  of  Congress,  is  hostile  to  the  reserved  rights  ol  the  states. 
The  Federal  court  may  not  have  power  to  torleit  the  charter 
ol  t'ne  Securities  company;  it  may  not  declare  ho\v  its  shares  ot 


346  TRUSTS,   POOLS  AND   CORPORATIONS 

stock  may  be  transferred  on  its  books,  nor  prohibit  it  from  ac- 
quiring real  estate,  nor  diminish  or  increase  its  capital  stock. 
All  these  and  like  matters  are  to  be  regulated  by  the  state  which 
created  the  company.  But  to  the  end  that  effect  be  given  to 
the  national  will,  lawfully  expressed,  Congress  may  prevent  that 
company,  in  its  capacity  as  a  holding  corporation  and  trustee, 
from  carrying  out  the  purposes  of  a  combination  formed  in 
restraint  of  interstate  commerce.  The  Securities  company  is 
itself  a  part  of  the  present  combination ;  its  head  and  front ; 
its  trustee.  It  would  be  extraordinary  if  the  court,  in  executing 
the  act  of  Congress,  could  not  lay  hands  upon  that  company  and 
prevent  it  from  doing  that  which,  if  done,  will  defeat  the  act  of 
Congress.  Upon  like  grounds  the  court  can,  by  appropriate 
orders,  prevent  the  two  competing  railroad  companies  here 
involved  from  cooperating  with  the  Securities  company  in  re- 
straining commerce  among  the  states.  In  short,  the  court  may 
make  any  order  necessary  to  bring  about  the  dissolution  or  sup- 
pression of  an  illegal  combination  that  restrains  interstate  com- 
merce. All  this  can  be  done  without  infringing  in  any  degree 
upon  the  just  authority  of  the  states.  The  affirmance  of  the 
judgment  below  will  only  mean  that  no  combination,  however 
powerful,  is  stronger  than  the  law,  or  will  be  permitted  to  avail 
itself  of  the  pretext  that  to  prevent  it  doing  that  which,  if  done, 
would  defeat  a  legal  enactment  of  Congress,  is  to  attack  the  re- 
served right  of  the  states.  It  would  mean  that  the  government 
which  represents  all,  can,  when  acting  within  the  limits  of  its 
powers,  compel  obedience  to  its  authority.  It  would  mean  that 
no  device  in  evasion  of  its  provisions,  however  skilfully  such  de- 
vice may  have  been  contrived,  and  no  combination,  by  whomso- 
ever formed,  is  beyond  the  reach  of  the  supreme  law  of  the  land, 
if  such  device  or  combination,  by  its  operation,  directly  restrains 
commerce  among  the  states  or  with  foreign  nations  in  violation 
of  the  act  of  Congress. 

The  defendants  rely,  with  some  confidence,  upon  the  case  of 
the  Baltimore  &  0.  R.  Co.  \.  Maryl-md,  21  Wall.,  456,  473,  22 
L.  ed.,  6/8,  684.  But  nothing  we  have  said  is  inconsistent  with 
any  principle  announced  in  that  case.  The  court  there  recog- 
nized the  principle  that  a  state  has  plenary  powers  "over  its 


THE   NORTHERN    SECURITIES   COMPANY  347 

own  territory,  its  highways,  its  franchises  and  its  corporations," 
and  observed  that  "  we  are  bound  to  sustain  the  constitutional 
powers  and  prerogatives  of  the  states,  as  'well  as  those  of  the 
United  States,  whenever  they  are  brought  before  us  for  adjudi- 
cation, no  matter  what  may  be  the  consequences."  Of  course, 
every  state  has,  in  a  general  sense,  plenary  power  over  its  cor- 
porations. But  is  it  conceivable  that  a  state,  when  exerting 
power  over  a  corporation  of  its  creation,  may  prevent  or  embar- 
rass the  exercise  by  Congress  of  any  power  with  which  it  is 
invested  by  the  Constitution?  In  the  case  just  referred  to  the 
court  does  not  say,  and  it  is  not  to  be  supposed  that  it  will  ever 
say,  that  any  power  exists  with  a  state  to  prevent  the  enforce- 
ment of  a  lawful  enactment  of  Congress^  or  to  invest  any  of  its 
corporations,  in  whatever  business  engaged,  with  authority  to 
disregard  such  enactment  or  defeat  its  legitimate  operation. 
On  the  contrary,  the  court  has  steadily  held  to  the  doctrine, 
vital  to  the  United  States  as  well  as  to  the  states,  that  a  state 
enactment,  even  if  passed  in  the  exercise  of  its  acknowledged 
powers,  must  yield,  in  case  of  conflict,  to  the  supremacy  of  the 
Constitution  of  the  United  States  and  the  acts  of  Congress 
enacted  in  pursuance  of  its  provisions.  This  results,  the  court 
has  said,  as  well  from  the  nature  of  the  government  as  from  the 
words  of  the  Constitution.  Gibbons  v.  Ogden,  9  Wheat.,  I,  210, 
6  L.  ed.,  23,  73  ;  Sinnot  v.  Davenport,  22  How  ,  227,  243,  16  L. 
ed.,  243,  247;  Re  Debs,  158  U.  S.,  564,  39  L.  ed.,  1092,  15  Sup. 
Ct.  Rep.,  900;  Missouri,  K.  eV  T.  R.  Co.  \~.  Haber,  169  U.  S., 
613,  626,  627,  42  L.  ed.,  878,  883,  1 8  Sup.  Ct.  Rep.,  488.  In 
Tc.vas  \.  Wliite,  7  Wall.,  700,  725,  19  L.  ed.,  227,  237,  the  court 
remarked  "  that  '  the  people  of  each  state  compose  a  state,  having 
its  own  government,  and  endowed  with  all  the  functions  essential 
to  separate  and  independent  existence,'  and  that  'without  the 
states  in  union,  there  could  be  no  such  political  body  as  the 
United  States.'  Lane  Comity  \ .  Oregon,  7  Walk,  76,  19  L.  ed., 
104.  Xot  only,  therefore,  can  there  be  no  loss  of  separate  and 
independent  autonomy  to  the  states,  through  their  union  under 
the  Constitution,  but  it  may  be  not  unreasonably  said  that  the 
preservation  of  the  states,  and  the  maintenance  of  their  govern- 
ments, are  as  much  within  the  design  and  care  of  the  Constitution 


348  TRUSTS,   POOLS  AND   CORPORATIONS 

as  the  preservation  of  the  Union  and  the  maintenance  of  the 
national  government."  These  doctrines  are  at  the  basis  of  our 
constitutional  government,  and  cannot  be  disregarded  with 
safety. 

The  defendants  also  rely  on  Louisville  &  N.  R.  Co.  v.  Ken- 
tucky, 161  U.  S.,  677,  702,  40  L.  ed.,  849,  859,  16  Sup.  Ct.  Rep., 
714,  724.  In  that  case  it  was  contended  by  the  railroad  com- 
pany that  the  assumption  of  the  state  to  forbid  the  consolidation 
of  parallel  and  competing  lines  was  an  interference  with  the 
power  of  Congress  over  interstate  commerce.  The  court  ob- 
served that  but  little  need  be  said  in  answer  to  such  a  proposi- 
tion, for  "it  has  never  been  supposed  that  the  dominant  power 
of  Congress  over  interstate  commerce  took  from  the  states  the 
power  of  legislation  with  respect  to  the  instruments  of  such 
commerce,  so  far  as  the  legislation  was  within  its  ordinary  police 
powers."  But  that  case  distinctly  recognized  that  there  was  a 
division  of  power  between  Congress  and  the  states  in  respect  to 
interstate  railways,  and  that  Congress  had  the  superior  right 
to  control  that  commerce  and  forbid  interference  therewith, 
while  to  the  states  remained  the  power  to  create  and  to  regulate 
the  instruments  of  such  commerce,  so  far  as  necessary  to  the 
conservation  of  the  public  interests.  If  there  is  anything  in 
that  case  wyhich  even  intimates  that  a  state  or  a  state  corporation 
may  in  any  way  directly  restrain  interstate  commerce,  over  which 
Congress  has,  by  the  Constitution,  complete  control,  we  have 
been  unable  to  find  it. 

The  question  of  the  relations  of  the  general  government  with 
the  states  is  again  presented  by  the  specific  contention  of  each 
defendant  that  Congress  did  not  intend  "to  limit  the  power 
of  the  several  states  to  create  corporations,  define  their  pur- 
poses, fix  the  amount  of  their  capital,  and  determine  who  may 
buy,  own  and  sell  their  stock."  All  that  is  true,  generally 
speaking,  but  the  contention  falls  far  short  of  meeting  the  con- 
trolling questions  in  this  case.  To  meet  this  contention  we 
must  repeat  some  things  already  said  in  this  opinion.  But  if 
what  we  have  said  be  sound,  repetition  will  do  no  harm.  So  far 
as  the  Constitution  of  the  United  States  is  concerned,  a  state 
may,  indeed,  create  a  corporation,  define  its  powers,  prescribe 


THE    NORTHERN    SECURITIES   COMPANY  349 

the  amount  of  its  stock  and  the  mode  in  which  it  may  be  trans- 
ferred. It  may  even  authorize  one  of  its  corporations  to  engage 
in  commerce  of  every  kind, — domestic,  interstate  and  inter- 
national. The  regulation  or  control  of  purely  domestic  com- 
merce of  a  state  is,  of  course,  with  the  state,  and  Congress  has 
no  direct  power  over  it  so  long  as  what  is  done  by  the  state  does 
not  interfere  with  the  operations  of  the  general  government,  or 
any  legal  enactment  of  Congress.  A  state,  if  it  chooses  so  to 
do,  may  even  submit  to  the  existence  of  combinations  within  its 
limits  that  restrain  its  internal  trade.  But  neither  a  state  cor- 
poration nor  its  stockholders  can,  by  reason  of  the  nonaction 
of  the  state  or  by  means  of  any  combination  among  such  stock- 
holders, interfere  with  the  complete  enforcement  of  any  rule 
lawfully  devised  by  Congress  for  the  conduct  of  commerce 
among  the  states  or  with  foreign  nations  ;  for,  as  we  have  seen, 
interstate  and  international  commerce  is,  by  the  Constitution, 
under  the  control  of  Congress,  and  it  belongs  to  the  legislative 
department  of  the  government  to  prescribe  rules  for  the  con- 
duct of  that  commerce.  If  it  were  otherwise,  the  declaration  in 
the  Constitution  of  its  supremacy,  and  of  the  supremacy  as  well 
of  the  laws  made  in  pursuance  of  its  provisions,  was  a  waste  of 
words.  Whilst  every  instrumentality  of  domestic  commerce  is 
subject  to  state  control,  every  instrumentality  of  interstate  com- 
merce may  be  reached  and  controlled  by  national  authority,  so 
far  as  to  compel  it  to  respect  tlie  rules  for  sncli  commerce  lawfully 
established  by  Congress.  No  corporate  person  can  excuse  a  de- 
parture from  or  violation  of  that  rule  under  the  plea  that  that 
which  it  has  done  or  omitted  to  do  is  permitted,  or  not  forbid- 
den, by  the  state  under  whose  authority  it  came  into  existence. 
\Ye  repeat  that  no  state  can  endow  any  of  its  corporations,  or 
any  combination  of  its  citizens,  with  authority  to  restrain  inter- 
state or  international  commerce,  or  to  disobey  the  national  will 
as  manifested  in  legal  enactments  of  Congress.  So  long  as 
Congress  keeps  within  the  limits  of  its  authority  as  defined  by 
the  Constitution,  infringing  no  rights  recognized  or  secured  by 
that  instrument,  its  regulations  of  interstate  and  international 
commerce,  whether  founded  in  wisdom  or  not,  must  be  sub- 
mitted to  bv  all.  Harm,  and  onlv  harm,  can  come  from  the 


350  TRUSTS,   POOLS  AND   CORPORATIONS 

failure  of  the  courts  to  recognize  this  fundamental  principle 
of  constitutional  construction.  To  depart  from  it  because  of 
the  circumstances  of  special  cases,  or  because  the  rule,  in  its 
operation,  may  possibly  affect  the  interests  of  business,  is  to 
endanger  the  safety  and  integrity  of  our  institutions  and  make 
the  Constitution  mean  not  what  it  says,  but  what  interested 
parties  wish  it  to  mean  at  a  particular  time  and  under  particular 
circumstances.  The  supremacy  of  the  law  is  the  foundation 
rock  upon  which  our  institutions  rest.  The  law,  this  court  said 
in  United  States  v.  Lee,  106  U.  S.,  196,  220,  27  L.  ed.,  171,  181, 
i  Sup.  Ct.  Rep.,  240,  is  the  only  supreme  power  in  our  system 
of  government.  And  no  higher  duty  rests  upon  this  court  than 
to  enforce,  by  its  decrees,  the  will  of  the  legislative  department 
of  the  government,  as  expressed  in  a  statute,  unless  such  statute 
be  plainly  and  unmistakably  in  violation  of  the  Constitution. 
If  the  statute  is  beyond  the  constitutional  power  of  Congress, 
the  court  would  fail  in  the  performance  of  a  solemn  duty  if  it 
did  not  so  declare.  But  if  nothing  more  can  be  said  than  that 
Congress  has  erred, — and  the  court  must  not  be  understood  as 
saying  that  it  has  or  has  not  erred,  —  the  remedy  for  the  error 
and  the  attendant  mischief  is  the  selection  of  new  senators  and 
representatives,  who,  by  legislation,  will  make  such  changes  in 
existing  statutes,  or  adopt  such  new  statutes,  as  may  be  de- 
manded by  their  constituents  and  be  consistent  with  law. 

Many  suggestions  were  made  in  argument  based  upon  the 
thought  that  the  Anti-Trust  Act  would,  in  the  end,  prove  to  be 
mischievous  in  its  consequences.  Disaster  to  business  and  wide- 
spread financial  ruin,  it  has  been  intimated,  will  follow  the  exe- 
cution of  its  provisions.  Such  predictions  were  made  in  all  the 
cases  heretofore  arising  under  that  act.  But  they  have  not  been 
verified.  It  is  the  history  of  monopolies  in  this  country  and  in 
England  that  predictions  of  ruin  are  habitually  made  by  them 
when  it  is  attempted,  by  legislation,  to  restrain  their  operations 
and  to  protect  the  public  against  their  exactions.  In  this,  as  in 
former  cases,  they  seek  shelter  behind  the  reserved  rights  of  the 
states  and  even  behind  the  constitutional  guaranty  of  liberty  of 
contract.  But  this  court  has  heretofore  adjudged  that  the  act 
of  Congress  did  not  touch  the  rights  of  the  states,  and  that  lib- 


THE    NORTHERN    SECURITIES   COMPANY  351 

erty  of  contract  did  not  involve  a  right  to  deprive  the  public 
of  the  advantages  of  free  competition  in  trade  and  commerce. 
Liberty  of  contract  does  not  imply  liberty  in  a  corporation  or 
individuals  to  defy  the  national  will,  when  legally  expressed. 
Nor  does  the  enforcement  of  a  legal  enactment  of  Congress 
infringe,  in  any  proper  sense,  the  general  inherent  right  of  every 
one  to  acquire  and  hold  property.  That  right,  like  all  other 
rights,  must  be  exercised  in  subordination  to  the  law. 

But  even  if  the  court  shared  the  gloomy  forebodings  in  which 
the  defendants  indulge,  it  could  not  refuse  to  respect  the  action 
of  the  legislative  branch  of  the  government  if  what  it  has  done 
is  within  the  limits  of  its  constitutional  power.  The  suggestions 
of  disaster  to  business  have,  we  apprehend,  their  origin  in  the 
zeal  of  parties  who  are  opposed  to  the  policy  underlying  the  act 
of  Congress  or  are  interested  in  the  result  of  this  particular  case  ; 
at  any  rate,  the  suggestions  imply  that  the  court  may  and  ought 
to  refuse  the  enforcement  of  the  provisions  of  the  act  if,  in  its 
judgment,  Congress  was  not  wise  in  prescribing  as  a  rule  by 
which  the  conduct  of  interstate  and  international  commerce  is 
to  be  governed,  that  every  combination,  whatever  its  form,  in 
restraint  of  such  commerce  and  the  monopolizing  or  attempting 
to  monopolize  such  commerce,  shall  be  illegal.  These,  plainly, 
are  questions  as  to  the  policy  of  legislation  which  belong  to 
another  department,  and  this  court  has  no  function  to  supervise 
such  legislation  from  the  standpoint  of  wisdom  or  policy.  We 
need  only  say  that  Congress  has  authority  to  declare,  and  by 
the  language  of  its  act,  as  interpreted  in  prior  cases,  has,  in  effect, 
declared,  that  the  freedom  of  interstate  and  international  com- 
merce shall  not  be  obstructed  or  disturbed  by  any  combination, 
conspiracy  or  monopoly  that  will  restrain  such  commerce,  by 
preventing  the  free  operation  of  competition  among  interstate 
carriers  engaged  in  the  transportation  of  passengers  and  freight. 
This  court  cannot  disregard  that  declaration  unless  Congress,  in 
passing  the  statute  in  question,  be  held  to  have  transgressed 
the  limits  prescribed  for  its  action  by  the  Constitution.  But,  as 
alreadv  indicated,  it  cannot  be  so  held  consistently  with  the 
provisions  ot  that  instrument. 

The   combination   here   in    question    may  have   been    for  the 


352  TRUSTS,   POOLS  AND   CORPORATIONS 

pecuniary  benefit  of  those  who  formed  or  caused  it  to  be  formed. 
But  the  interests  of  private  persons  and  corporations  cannot  be 
made  paramount  to  the  interests  of  the  general  public.  Under 
the  Articles  of  Confederation  commerce  among  the  original 
states  was  subject  to  vexatious  and  local  regulations  that  took 
no  account  of  the  general  welfare.  But  it  was  for  the  protec- 
tion of  the  general  interests,  as  involved  in  interstate  and 
international  commerce,  that  Congress,  representing  the  whole 
country,  was  given  by  the  Constitution  full  power  to  regulate 
commerce  among  the  states  and  with  foreign  nations.  In 
Brown  v.  Maryland,  12  Wheat.,  419,  446,  6  L.  ed.,  678,  688, 
it  was  said:  "Those  who  felt  the  injury  arising  from  this  state 
of  things,  and  those  who  were  capable  of  estimating  the  influ- 
ence of  commerce  on  the  prosperity  of  nations,  perceived  the 
necessity  of  giving  the  control  over  this  important  subject  to  a 
single  government.  It  may  be  doubted  whether  any  of  the 
evils  proceeding  from  the  feebleness  of  the  Federal  government 
contributed  more  to  that  great  revolution  which  introduced  the 
present  system  than  the  deep  and  general  conviction  that  com- 
merce ought  to  be  regulated  by  Congress."  Railroad  compa- 
nies, we  said  in  the  Trans-Missouri  Freight  Asso.  case,  "  are 
instruments  of  commerce,  and  their  business  is  commerce  itself." 
And  such  companies,  it  must  be  remembered,  operate  "  public 
highways,  established  primarily  for  the  convenience  of  the  peo- 
ple, and  therefore  are  subject  to  governmental  control  and 
regulation." 


When   such   carriers,   in  the    exercise   of    public    franchises, 
engage  in  the  transportation  of  passengers  and  freight  among 
the  states,  they  become  —  even  if  they  be  state  corporations  — 
subject  to  such  rules  as  Congress  may  lawfully  establish  for  the 
conduct  of  interstate  commerce. 

It  was  said  in  argument  that  the  circumstances  under  which 
the  Northern  Securities  Company  obtained  the  stock  of  the  con- 
stituent companies  imported  simply  an  investment  in  the  stock 
of  other  corporations,  —  a  purchase  of  that  stock;  which  invest- 
ment or  purchase,  it  is  contended,  was  not  forbidden  by  the 


THE    NORTHERN    SECURITIES   COMPANY  353 

charter  of  the  company,  and  could  not  be  made  illegal  by  any 
act  of  Congress.  This  view  is  wholly  fallacious,  and  does  not 
comport  with  the  actual  transaction.  There  was  no  actual  invest- 
ment, in  any  substantial  sense,  by  the  Northern  Securities  Com- 
pany in  the  stock  of  the  two  constituent  companies.  If  it  was, 
in  form,  such  a  transaction,  it  was  not,  in  fact,  one  of  that  kind. 
However  that  company  may  have  acquired  for  itself  any  stock 
in  the  Great  Northern  and  Northern  Pacific  Railway  Companies, 
no  matter  how  it  obtained  the  means  to  do  so,  all  the  stock  it 
held  or  acquired  in  the  constituent  companies  was  acquired  and 
held  to  be  used  in  suppressing  competition  between  those  com- 
panies. It  came  into  existence  only  for  that  purpose.  If  any 
one  had  full  knowledge  of  what  was  designed  to  be  accomplished, 
and  as  to  what  was  actually  accomplished,  by  the  combination 
in  question,  it  was  the  defendant  Morgan.  In  his  testimony  he 
was  asked,  "  Why  put  the  stocks  of  bjtli  these  [constituent  com- 
panies] into  one  holding  company  ? "  He  frankly  answered, 
"  In  the  first  place,  this  holding  company  was  simply  a  question 
of  custodian,  because  it  had  no  other  alliances."  That  disclosed 
the  actual  nature  of  the  transaction,  which  was  only  to  organize 
the  Northern  Securities  Company  as  a  Jiolding  company,  in 
whose  hands,  not  as  a  real  purchaser  or  absolute  owner,  but 
simply  as  custodian,  were  to  be  placed  the  stocks  of  the  constitu- 
ent companies,  —  such  custodian  to  represent  the  combination 
formed  between  the  shareholders  of  the  constituent  companies, 
the  direct  and  necessary  effect  of  such  combination  being,  as 
already  indicated,  to  restrain  and  monopolize  interstate  com- 
merce by  suppressing,  or  (to  use  the  words  of  this  court  in 
I'nitcd  States  \.  Joint  Traffic  Asso.}  "smothering"  competition 
between  the  lines  of  two  railway  carriers. 

\Ye  will  now  inquire  as  to  the  nature  and  extent  of  the  relief 
granted  to  the  government  by  the  decree  below. 


Guided  by  these  long-established  rules  of  construction,  it  is 
manifest  that  if  the  .Anti-Trust  Act  is  held  not  to  embrace  a 
case  such  as  is  now  before  us,  the  plain  intention  of  the  legisla- 
tive branch  of  the  government  will  be  defeated.  If  Congress  has 


354  TRUSTS,   POOLS  AND   CORPORATIONS 

not,  by  the  words  used  in  the  act,  described  this  and  like  cases, 
it  would,  we  apprehend,  be  impossible  to  find  words  that  would 
describe  them.  This,  it  must  be  remembered,  is  a  suit  in  equity, 
instituted  by  authority  of  Congress  "  to  prevent  and  restrain 
violations  of  the  act,"  §  4;  and  the  court,  in  virtue  of  a  well- 
settled  rule  governing  proceedings  in  equity,  may  mould  its 
decree  so  as  to  accomplish  practical  results,  —  such  results  as 
law  and  justice  demand.  The  defendants  have  no  just  cause 
to  complain  of  the  decree,  in  matter  of  law,  and  it  should  be 
affirmed. 

The  judgment  of  the  court  is  that  the  decree  below  be  and 
hereby  is  affirmed,  with  liberty  to  the  circuit  court  to  proceed 
in  the  execution  of  its  decree  as  the  circumstances  may  require. 

Affirmed. 

Mr.  Justice  Brewer,  concurring: 

I  cannot  assent  to  all  that  is  said  in  the  opinion  just  announced, 
and  believe  that  the  importance  of  the  case  and  the  questions 
involved  justify  a  brief  statement  of  my  views. 

First,  let  me  say  that  while  I  \vas  with  the  majority  of 
the  court  in  the  decision  in  United  States  v.  Trans-Missouri 
Freight  Asso.,  etc.,  .  .  .  and  while  a  further  examination  (which 
has  been  induced  by  the  able  and  exhaustive  arguments  of 
counsel  in  the  present  case)  has  not  disturbed  the  conviction 
that  those  cases  were  rightly  decided,  I  think  that  in  some 
respects  the  reasons  given  for  the  judgments  cannot  be  sus- 
tained. Instead  of  holding  that  the  Anti-Trust  Act  included  all 
contracts,  reasonable  or  unreasonable,  in  restraint  of  interstate 
trade,  the  ruling  should  have  been  that  the  contracts  there  pre- 
sented were  unreasonable  restraints  of  interstate  trade,  and  as 
such  within  the  scope  of  the  act.  That  act,  as  appears  from  its 
title,  was  levelled  at  only  "unlawful  restraints  and  monopolies." 
Congress  did  not  intend  to  reach  and  destroy  those  minor  con- 
tracts in  partial  restraint  of  trade  which  the  long  course  of 
decisions  at  common  law  had  affirmed  were  reasonable  and 
ought  to  be  upheld.  The  purpose  rather  was  to  place  a  statu- 
tory prohibition,  with  prescribed  penalties  and  remedies,  upon 
those  contracts  which  were  in  direct  restraint  of  trade,  unrea- 


THE    NORTHERN    SECURITIES   COMPANY  355 

sonable,  and  against  public  policy.  Whenever  a  departure 
from  common-law  rules  and  definitions  is  claimed,  the  purpose 
to  make  the  departure  should  be  clearly  shown.  Such  a  pur- 
pose does  not  appear,  and  such  a  departure  was  not  intended. 

Further,  the  general  language  of  the  act  is  also  limited  by 
the  power  which  each  individual  has  to  manage  his  own  prop- 
erty and  determine  the  place  and  manner  of  its  investment. 
Freedom  of  action  in  these  respects  is  among  the  inalienable 
rights  of  every  citizen.  If,  applying  this  thought  to  the  pres- 
ent case,  it  appeared  that  Mr.  Hill  was  the  owner  of  a  majority 
of  the  stock  in  the  Great  Northern  Railway  Company,  he  could 
not,  by  any  act  of  Congress,  be  deprived  of  the  right  of  invest- 
ing his  surplus  means  in  the  purchase  of  stock  of  the  Northern 
Pacific  Railway  Company,  although  such  purchase  might  tend 
to  vest  in  him  through  that  ownership  a  control  over  both  com- 
panies. In  other  words,  the  right  which  all  other  citizens  had, 
of  purchasing  Northern  Pacific  stock,  could  not  be  denied  to 
him  by  Congress  because  of  his  ownership  of  stock  in  the  Great 
Northern  Company.  Such  was  the  ruling  in  I^carsall  v.  Great 
Northern  R.  Co.,  161  U.  S.,  646,  40  L.  ed.,  838,  16  Sup.  Ct. 
Rep.,  705,  in  which  this  court  said  (page  671,  L.  ed.,  page  847, 
Sup.  Ct.  Rep.,  712),  in  reference  to  the  right  of  the  stockholders 
of  the  Great  Northern  Company  to  purchase  the  stock  of  the 
Northern  Pacific  Railway  Company,  "  Doubtless  these  stock- 
holders could  lawfully  acquire,  by  individual  purchases,  a  major- 
ity or  even  the  whole  of  the  stock  of  the  reorganized  company, 
and  thus  possibly  obtain  its  ultimate  control  ;  but  the  companies 
would  still  remain  separate  corporations,  with  no  interests,  as 
such,  in  common." 

But  no  such  investment  by  a  single  individual  of  his  means  is 
here  presented.  There  was  a  combination  by  several  individuals, 
separately  owning  stock  in  two  competing  railroad  companies, 
to  place  the  control  of  both  in  a  single  corporation.  The  pur- 
pose to  combine,  and  by  combination  destroy  competition,  existed 
before  the  organization  of  the  corporation,  the  Securities  com- 
pany. That  corporation,  though  nominally  having  a  capital 
stock  of  8400.000,000,  had  no  means  of  its  own  ;  S 30,000  in 
cash  was  put  into  its  treasury,  but  simply  for  the  expenses  ol 


356  TRUSTS,   POOLS  AND   CORPORATIONS 

organization.  The  organizers  might  just  as  well  have  made  the 
nominal  stock  a  thousand  millions  as  four  hundred,  and  the 
corporation  would  have  been  no  richer  or  poorer.  A  corpora- 
tion, while  by  fiction  of  law  recognized  for  some  purposes  as  a 
person,  and,  for  purposes  of  jurisdiction,  as  a  citizen,  is  not  en- 
dowed with  the  inalienable  rights  of  a  natural  person.  It  is 
an  artificial  person,  created  and  existing  only  for  the  convenient 
transaction  of  business.  In  this  case  it  was  a  mere  instrumen- 
tality by  which  separate  railroad  properties  were  combined  under 
one  control.  That  combination  is  as  direct  a  restraint  of  trade 
by  destroying  competition  as  the  appointment  of  a  committee 
to  regulate  rates.  The  prohibition  of  such  a  combination  is  not 
at  all  inconsistent  with  the  right  of  an  individual  to  purchase 
stock.  The  transfer  of  stock  to  the  Securities  company  was 
a  mere  incident,  the  manner  in  which  the  combination  to  destroy 
competition,  and  thus  unlawfully  restrain  trade,  was  carried  out. 
If  the  parties  interested  in  these  two  railroad  companies  can, 
through  the  instrumentality  of  a  holding  corporation,  place  both 
under  one  control,  then  in  like  manner,  as  was  conceded  on  the 
argument  by  one  of  the  counsel  for  the  appellants,  could  the 
control  of  all  the  railroad  companies  in  the  country  be  placed 
in  a  single  corporation.  Nor  need  this  arrangement  for  con- 
trol stop  with  what  has  already  been  done.  The  holders  of 
3201,000,000  of  stock  in  the  Northern  Securities  Company 
might  organize  another  corporation  to  hold  their  stock  in  that 
company,  and  the  new  corporation,  holding  the  majority  of  the 
stock  in  the  Northern  Securities  Company,  and  acting  in  obe- 
dience to  the  wishes  of  a  majority  of  its  stockholders,  would 
control  the  action  of  the  Securities  company  and  through  it  the 
action  of  the  two  railroad  companies;  and  this  process  might  be 
extended  until  a  single  corporation  whose  stock  was  owned  by 
three  or  four  parties  would  be  in  practical  control  of  both  roads ; 
or,  having  before  us  the  possibilities  of  combination,  the  control 
of  the  whole  transportation  system  of  the  country.  I  cannot 
believe  that  to  be  a  reasonable  or  lawful  restraint  of  trade. 


I  have  felt  constrained  to  make  these  observations  for  fear 


THE    NORTHERN    SECURITIES   COMPANY  357 

that  the  broad  and  sweeping  language  of  the  opinion  of  the 
court  might  tend  to  unsettle  legitimate  business  enterprises, 
stifle  or  retard  wholesome  business  activities,  encourage  improper 
disregard  of  reasonable  contracts,  and  invite  unnecessary  litiga- 
tion. 

Mr.  Justice  Holmes,  with  whom  concurred  the  Chief  Justice, 
Mr.  Justice  White,  and  Mr.  Justice  Peckham,  dissenting  : 

I  am  unable  to  agree  with  the  judgment  of  the  majority  of 
the  court,  and  although  I  think  it  useless  and  undesirable,  as 
a  rule,  to  express  dissent,  I  feel  bound  to  do  so  in  this  case 
and  to  give  my  reasons  for  it. 

Great  cases,  like  hard  cases,  make  bad  law.  For  great  cases 
are  called  great,  not  by  reason  of  their  real  importance  in  shap- 
ing the  law  of  the  future,  but  because  of  some  accident  of  imme- 
diate overwhelming  interest  which  appeals  to  the  feelings  and 
distorts  the  judgment.  These  immediate  interests  exercise  a 
kind  of  hydraulic  pressure  which  makes  what  previously  was 
clear  seem  doubtful,  and  before  which  even  well-settled  prin- 
ciples of  law  will  bend.  What  we  have  to  do  in  this  case  is  to 
find  the  meaning  of  some  not  very  difficult  words.  \Ve  must 
try,  —  I  have  tried, — to  do  it  with  the  same  freedom  of  natural 
and  spontaneous  interpretation  that  one  would  be  sure  of  if 
the  same  question  arose  upon  an  indictment  for  a  similar  act 
which  excited  no  public  attention,  and  was  of  importance  only 
to  a  prisoner  before  the  court.  Furthermore,  while  at  times 
judges  need  for  their  work  the  training  of  economists  or  states- 
men, and  must  act  in  view  of  their  foresight  of  consequences, 
yet,  when  their  task  is  to  interpret  and  apply  the  words  of  a 
statute,  their  function  is  merely  academic  to  begin  with,  —  to 
read  Fnglish  intelligently,  —  and  a  consideration  of  conse- 
quences comes  into  play,  if  at  all,  only  when  the  meaning  of 
the  words  used  is  open  to  reasonable  doubt. 

The  question  to  be  decided  is  whether,  under  the  act  of  July 
2,  1890  (26  Stat.  at  L.,  209,  chap.  647,  U.  S.  Comp.  Stat.,  1901, 
page  .}2OO),  it  is  unlawful,  at  any  stage  of  the  process,  if  several 
men  unite  to  form  a  corporation  for  the  purpose  of  buying  more 
than  half  the  stock  of  each  of  two  competing  interstate  railroad 


358  TRUSTS,   POOLS  AND   CORPORATIONS 

companies,  if  they  form  the  corporation,  and  the  corporation 
buys  the  stock.  I  will  suppose  further  that  every  step  is  taken, 
from  the  beginning,  with  the  single  intent  of  ending  competition 
between  the  companies.  I  make  this  addition  not  because  it 
may  not  be  and  is  not  disputed,  but  because,  as  I  shall  try 
to  show,  it  is  totally  unimportant  under  any  part  of  the  statute 
with  which  we  have  to  deal. 

The  statute  of  which  we  have  to  find  the  meaning  is  a  criminal 
statute.  The  two  sections  on  which  the  government  relies  both 
make  certain  acts  crimes.  That  is  their  immediate  purpose  and 
that  is  what  they  say.  It  is  vain  to  insist  that  this  is  not  a 
criminal  proceeding.  The  words  cannot  be  read  one  way  in 
a  suit  which  is  to  end  in  fine  and  imprisonment  and  another 
way  in  one  which  seeks  an  injunction.  The  construction  which 
is  adopted  in  this  case  must  be  adopted  in  one  of  the  other  sort. 
I  am  no  friend  of  artificial  interpretations  because  a  statute 
is  of  one  kind  rather  than  another,  but  all  agree  that  before 
a  statute  is  to  be  taken  to  punish  that  which  always  has  been 
lawful,  it  must  express  its  intent  in  clear  words.  So  I  say  we 
must  read  the  words  before  us  as  if  the  question  were  whether 
two  small  exporting  grocers  should  go  to  jail. 

Again,  the  statute  is  of  a  very  sweeping  and  general  character. 
It  hits  "every"  contract  or  combination  of  the  prohibited  sort, 
great  or  small,  and  "every"  person  who  shall  monopolize  or 
attempt  to  monopolize,  in  the  sense  of  the  act,  "  any  part " 
of  the  trade  or  commerce  among  the  several  states.  There  is  a 
natural  inclination  to  assume  that  it  was  directed  against  certain 
great  combinations,  and  to  read  it  in  that  light.  It  does  not  say 
so.  On  the  contrary,  it  says  "every,"  and  "any  part."  Still 
less  was  it  directed  specially  against  railroads.  There  even  was 
a  reasonable  doubt  whether  it  included  railroads  until  the  point 
was  decided  by  this  court. 

Finally,  the  statute  must  be  construed  in  such  a  way  as  not 
merely  to  save  its  constitutionality,  but,  so  far  as  is  consistent 
with  a  fair  interpretation,  not  to  raise  grave  doubts  on  that  score. 
I  assume,  for  the  purposes  of  discussion,  although  it  would  be 
a  great  and  serious  step  to  take,  that  in  some  case  that  seemed 
to  it  to  need  heroic  measures,  Congress  might  regulate  not  only 


THE   NORTHERN    SECURITIES   COMPANY  359 

commerce,  but  instruments  of  commerce,  or  contracts  the  bear- 
ing of  which  upon  commerce  would  be  only  indirect.  But  it  is 
clear  that  the  mere  fact  of  an  indirect  effect  upon  commerce,  not 
shown  to  be  certain  and  very  great,  would  not  justify  such  a 
law.  The  point  decided  in  United  States  v.  E.  C.  Knight  Co., 
156  U.  S.,  i,  17,  39  L.  ed.,  325,  331,  15  Sup.  Ct.  Rep,  249,  255, 
was  that  "the  fact  .  .  .  that  trade  or  commerce  might  be  indi- 
rectly affected  was  not  enough  to  entitle  complainants  to  a 
decree."  Commerce  depends  upon  population,  but  Congress 
could  not,  on  that  ground,  undertake  to  regulate  marriage  and 
divorce.  If  the  act  before  us  is  to  be  carried  out  according  to 
what  seems  to  me  the  logic  of  the  argument  for  the  government, 
which  I  do  not  believe  that  it  will  be,  I  can  see  no  part  of  the 
conduct  of  life  with  which,  on  similar  principles,  Congress  might 
not  interfere. 

This  act  is  construed  by  the  government  to  affect  the  pur- 
chasers of  shares  in  two  railroad  companies  because  of  the  effect 
it  may  have,  or,  if  you  like,  is  certain  to  have,  upon  the  competi- 
tion of  these  roads.  If  such  a  remote  result  of  the  exercise  of 
an  ordinary  incident  of  property  and  personal  freedom  is  enough 
to  make  that  exercise  unlawful,  there  is  hardly  any  transaction 
concerning  commerce  between  the  states  that  may  not  be  made 
a  crime  by  the  finding  of  a  jury  or  a  court.  The  personal 
ascendency  of  one  man  may  be  such  that  it  would  give  to  his 
advice  the  effect  of  a  command,  if  he  owned  but  a  single  share 
in  each  road.  The  tendency  of  his  presence  in  the  stockholders' 
meetings  might  be  certain  to  prevent  competition,  and  thus  his 
advice,  if  not  his  mere  existence,  become  a  crime. 

I  state  these  general  considerations  as  matters  which  I  should 
have  to  take  into  account  before  I  could  agree  to  affirm  the 
decree  appealed  from,  but  I  do  not  need  them  for  my  own 
opinion,  because,  when  I  read  the  act  I  cannot  feel  sufficient 
doubt  as  to  the  meaning  of  the  words  to  need  to  fortify  my 
conclusion  by  any  generalities.  Their  meaning  seems  to  me 
plain  on  their  face. 

The  first  section  makes  "  every  contract,  combination  in  the 
form  of  trust  or  otherwise,  or  conspiracy  in  restraint  ot  trade  or 
commerce  among  the  several  states,  or  with  foreign  nations"  a 


360  TRUSTS,    POOLS  AND   CORPORATIONS 

misdemeanor,  punishable  by  fine,  imprisonment,  or  both.  Much 
trouble  is  made  by  substituting  other  phrases  assumed  to  be 
equivalent,  which  then  are  reasoned  from  as  if  they  were  in  the 
act.  The  court  below  argued  as  if  maintaining  competition  were 
the  expressed  object  of  the  act.  The  act  says  nothing  about 
competition.  I  stick  to  the  exact  words  used.  The  words  hit 
two  classes  of  cases,  and  only  two,  —  contracts  in  restraint  of 
trade  and  combinations  or  conspiracies  in  restraint  of  trade,— 
and  we  have  to  consider  what  these  respectively  are.  Contracts 
in  restraint  of  trade  are  dealt  with  and  denned  by  the  common 
law.  They  are  contracts  with  a  stranger  to  the  contractor's 
business  (although,  in  some  cases,  carrying  on  a  similar  one), 
which  wholly  or  partially  restrict  the  freedom  of  the  contractor 
in  carrying  on  that  business  as  otherwise  he  would.  The  objec- 
tion of  the  common  law  to  them  was,  primarily,  on  the  con- 
tractor's own  account.  The  notion  of  monopoly  did  not  come 
in  unless  the  contract  covered  the  whole  of  England.  Mitchel 
v.  Reynolds,  I  P.  Wms.,  181.  Of  course,  this  objection  did  not 
apply  to  partnerships  or  other  forms,  if  there  were  any,  of  sub- 
stituting a  community  of  interest  where  there  had  been  competi- 
tion. There  was  no  objection  to  such  combinations  merely  as  in 
restraint  of  trade  or  otherwise  unless  they  amounted  to  a  monop- 
oly. Contracts  in  restraint  of  trade,  I  repeat,  were  contracts  with 
strangers  to  the  contractor's  business,  and  the  trade  restrained 
was  the  contractor's  own. 

Combinations  or  conspiracies  in  restraint  of  trade,  on  the  other 
hand,  were  combinations  to  keep  strangers  to  the  agreement  out 
of  the  business.  The  objection  to  them  was  not  an  objection  to 
their  effect  upon  the  parties  making  the  contract,  the  members 
of  the  combination  or  firm,  but  an  objection  to  their  intended 
effect  upon  strangers  to  the  firm  and  their  supposed  consequent 
effect  upon  the  public  at  large.  In  other  words,  they  were 
regarded  as  contrary  to  public  policy  because  they  monopolized, 
or  attempted  to  monopolize,  some  portion  of  the  trade  or  com- 
merce of  the  realm.  See  United  States  v.  E.  C.  Knight  Co.  156 
U.  S.,  i,  39  L.  eel.,  325,  15  Sup.  Ct.  Rep.,  249.  All  that  is  added 
to  the  first  section  by  §  2  is  that  like  penalties  are  imposed  upon 
every  single  person  who,  without  combination,  monopolizes,  or 


THE    NORTHERN    SECURITIES   COMPANY  361 

attempts  to  monopolize,  commerce  among  the  states;  and  that 
the  liability  is  extended  to  attempting  to  monopolize  any  part  of 
such  trade  or  commerce.  It  is  more  important  as  an  aid  to  the 
construction  of  §  i  than  it  is  on  its  own  account.  It  shows  that 
whatever  is  criminal  when  done  by  way  of  combination  is  equally 
criminal  if  done  by  a  single  man.  That  I  am  right  in  my  inter- 
pretation of  the  words  of  §  I  is  shown  by  the  words  "  in  the 
form  of  trust  or  otherwise."  The  prohibition  M-as  suggested  by 
the  trusts,  the  objection  to  which,  as  every  one  knows,  was  not 
the  union  of  former  competitors,  but  the  sinister  power  exercised 
or  supposed  to  be  exercised  by  the  combination  in  keeping  rivals 
out  of  the  business  and  ruining  those  who  alreadv  were  in.  It 

C5  j 

was  the  ferocious  extreme  of  competition  with  others,  not  the 
cessation  of  competition  among  the  partners,  that  was  the  evil 
feared.  Further  proof  is  to  be  found  in  §  7,  giving  an  action  to 
any  person  injured  in  his  business  or  property  by  the  forbidden 
conduct.  This  cannot  refer  to  the  parties  to  the  agreement, 
and  plainly  means  that  outsiders  who  are  injured  in  their  attempt 
to  compete  with  a  trust  or  other  similar  combination  may  re- 
cover for  it.  W.  W.  Montague  &  Co.  v.  Loi^iy,  193  U.  S.,  38; 
24  Sup.  Ct.  Rep.,  307.  Mow  effective  the  section  may  be  or 
how  far  it  goes  is  not  material  to  my  point.  My  general  sum- 
mary of  the  two  classes  of  cases  which  the  act  affects  is  con- 
firmed by  the  title,  which  is  "  An  Act  to  Protect  Trade  and 
Commerce  Against  Unlawful  Restraints  and  Monopolies." 

What  I  now  ask  is  under  which  of  the  foregoing  classes  this 
case  is  supposed  to  come;  and  that  question  must  be  answered 
as  definitely  and  precisely  as  if  we  were  dealing  with  the  indict- 
ments which  logical! v  ought  to  follow  this  decision.  The  pro- 
vision of  the  statute  against  contracts  in  restraint  of  trade  has 
been  held  to  apply  to  contracts  between  railroads,  otherwise 
remaining  independent,  by  which  they  restricted  their  respec- 
tive freedom  as  to  rates.  This  restriction  by  contract  with  a 
stranger  to  the  contractor's  business  is  the  ground  of  the  deci- 
sion in  I'nitcii  States  v.  Joint  Traffic  Asso.,  \~\  U.  S.,  505,43 
L.  ed.,  259,  19  Sup.  Ct.  Rep.,  25,  following  and  affirming 
United  States  v.  Trans-Missouri  l:rci^lit  Asso.,  1 66  l\  S.,  290, 
41  L.  ed.,  1007,  17  Sup.  Ct.  Rep.,  540.  I  accept  those  decisions 


362  TRUSTS,   POOLS  AND   CORPORATIONS 

absolutely,  not  only  as  binding  upon  me,  but  as  decisions  which 
I  have  no  desire  to  criticise  or  abridge.  But  the  provision  has 
not  been  decided,  and,  it  seems  to  me,  could  not  be  decided 
without  a  perversion  of  plain  language,  to  apply  to  an  arrange- 
ment by  which  competition  is  ended  through  community  of 
interest,  —  an  arrangement  which  leaves  the  parties  without 
external  restriction.  That  provision,  taken  alone,  does  not 
require  that  all  existing  competitions  shall  be  maintained.  It 
does  not  look  primarily,  if  at  all,  to  competition.  It  simply 
requires  that  a  party's  freedom  in  trade  between  the  states  shall 
not  be  cut  clown  by  contract  with  a  stranger.  So  far  as  that 
phrase  goes,  it  is  lawful  to  abolish  competition  by  any  form  of 
union.  It  would  seem  to  me  impossible  to  say  that  the  words 
"every  contract  in  restraint  of  trade  is  a  crime,  punishable  with 
imprisonment,"  would  send  the  members  of  a  partnership  be- 
tween, or  a  consolidation  of,  two  trading  corporations  to  prison, 
—  still  more  impossible  to  say  that  it  forbade  one  man  or  cor- 
poration to  purchase  as  much  stock  as  he  liked  in  both.  Yet 
those  words  would  have  that  effect  if  this  clause  of  §  I  applies 
to  the  defendants  here.  For  it  cannot  be  too  carefully  remem- 
bered that  that  clause  applies  to  "every"  contract  of  the  for- 
bidden kind,  —  a  consideration  which  was  the  turning  point  of 
the  Trans-Missouri  Freight  Association's  case. 

If  the  statute  applies  to  this  case  it  must  be  because  the 
parties,  or  some  of  them,  have  formed,  or  because  the  Northern 
Securities  Company  is,  a  combination  in  restraint  of  trade  among 
the  states,  or,  what  comes  to  the  same  thing,  in  my  opinion, 
because  the  defendants,  or  some  or  one  of  them,  are  monopo- 
lizing, or  attempting  to  monopolize,  some  part  of  the  commerce 
between  the  states.  But  the  mere  reading  of  those  words  shows 
that  they  are  used  in  a  limited  and  accurate  sense.  According 
to  popular  speech,  every  concern  monopolizes  whatever  business 
it  does,  and  if  that  business  is  trade  between  two  states  it  monopo- 
lizes a  part  of  the  trade  among  the  states.  Of  course,  the  statute 
does  not  forbid  that.  It  docs  not  mean  that  all  business  must 
cease.  A  single  railroad  down  a  narrow  valley  or  through  a 
mountain  gorge  monopolizes  all  the  railroad  transportation 
through  that  valley  or  gorge.  Indeed,  every  railroad  monopo- 


THE    NORTHERN    SECURITIES   COMPANY  363 

lizes,  in  a  popular  sense,  the  trade  of  some  area.  Yet  I  suppose 
no  one  would  say  that  the  statute  forbids  a  combination  of  men 
into  a  corporation  to  build  and  run  such  a  railroad  between  the 
states. 

I  assume  that  the  Minnesota  charter  of  the  Great  Northern, 
and  the  Wisconsin  charter  of  the  Northern  Pacific,  both  are 
valid.  Suppose  that,  before  either  road  was  built,  Minnesota, 
as  part  of  a  system  of  transportation  between  the  states,  had 
created  a  railroad  company  authorized  singly  to  build  all  the 
lines  in  the  states  now  actually  built,  owned  or  controlled  by 
either  of  the  two  existing  companies.  I  take  it  that  that  charter 
would  have  been  just  as  good  as  the  present  one,  even  if  the 
statutes  which  we  are  considering  had  been  in  force.  In  what- 
ever sense  it  would  have  created  a  monopoly,  the  present  charter 
does.  It  would  have  been  a  large  one,  but  the  act  of  Congress 
makes  no  discrimination  according  to  size.  Size  has  nothing  to 
do  with  the  matter.  A  monopoly  of  "any  part"  of  commerce 
among  the  states  is  unlawful.  The  supposed  company  would 
have  owned  lines  that  might  have  been  competing  ;  probably 
the  present  one  does.  But  the  act  of  Congress  will  not  be  con- 
strued to  mean  the  universal  disintegration  of  society  into  single 
men,  each  at  war  with  all  the  rest,  or  even  the  prevention  of  all 
further  combinations  for  a  common  end. 

There  is  a  natural  feeling  that  somehow  or  other  the  statute 
meant  to  strike  at  combinations  great  enough  to  cause  just 
anxiety  on  the  part  of  those  who  love  their  country  more  than 
money,  while  it  viewed  such  little  ones  as  I  have  supposed  with 
just  indifference.  This  notion,  it  may  be  said,  somehow  breathes 
from  the  pores  of  the  act,  although  it  seems  to  be  contradicted 
in  every  way  by  the  words  in  detail.  And  it  has  occurred  to 
me  that  it  might  be  that  when  a  combination  reached  a  certain 
size  it  might  have  attributed  to  it  more  ot  the  character  of  a 
monopoly  merely  by  virtue  of  its  size  than  would  be  attributed 
to  a  smaller  one.  I  am  quite  clear  that  it  is  only  in  connection 
with  monopolies  that  size  could  play  any  part.  But  my  answer 
has  been  indicated  already.  In  the  first  place,  size,  in  the  case 
of  railroads,  is  an  inevitable  incident  ;  and  it  it  were  an  objection 
under  the  act,  the  Great  Northern  and  the  Northern  Pacific 


364  TRUSTS,   POOLS   AND    CORPORATIONS 

already  were  too  great  and  encountered  the  law.  In  the  next 
place,  in  the  case  of  railroads  it  is  evident  that  the  size  of  the 
combination  is  reached  for  other  ends  than  those  which  would 
make  them  monopolies.  The  combinations  are  not  formed  for 
the  purpose  of  excluding  others  from  the  field.  Finally,  even 
a  small  railroad  will  have  the  same  tendency  to  exclude  others 
from  its  narrow  area  that  great  ones  have  to  exclude  others 
from  the  greater  one,  and  the  statute  attacks  the  small  monopo- 
lies as  well  as  the  great.  The  very  words  of  the  act  make 
such  a  distinction  impossible  in  this  case,  and  it  has  not  been 
attempted  in  express  terms. 

If  the  charter  which  I  have  imagined  above  would  have  been 
good  notwithstanding  the  monopoly,  in  a  popular  sense,  which 
it  created,  one  next  is  led  to  ask  whether  and  why  a  combina- 
tion or  consolidation  of  existing  roads,  although  in  actual  com- 
petition, into  one  company  of  exactly  the  same  powers  and 
extent,  would  be  any  more  obnoxious  to  the  law.  Although  it 
was  decided  in  Louisville  &  N.  R.  Co.  v.  Kentucky,  161  U.  S., 
677,  701,  40  L.  ed.,  849,  859,  16  Sup.  Ct.  Rep.,  714,  that  since 
the  statute,  as  before,  the  states  have  the  power  to  regulate  the 
matter,  it  was  said,  in  the  argument,  that  such  a  consolidation 
would  be  unlawful,  and  it  seems  to  me  that  the  Attorney-Gen- 
eral was  compelled  to  say  so  in  order  to  maintain  his  case.  But 
I  think  that  logic  would  not  let  him  stop  there,  or  short  of  deny- 
ing the  power  of  a  state  at  the  present  time  to  authorize  one 
company  to  construct  and  own  two  parallel  lines  that  might 
compete.  The  monopoly  would  be  the  same  as  if  the  roads 
were  consolidated  after  they  had  begun  to  compete;  and  it  is 
on  the  footing  of  monopoly  that  I  now  am  supposing  the  objec- 
tion made.  But  to  meet  the  objection  to  the  prevention  of  com- 
petition at  the  same  time,  I  will  suppose  that  three  parties  apply 
to  a  state  for  charters ;  one  for  each  of  two  new  and  possibly 
competing  lines  respectively,  and  one  for  both  of  these  lines, 
and  that  the  charter  is  granted  to  the  last.  I  think  that  charter 
would  be  good,  and  I  think  the  whole  argument  to  the  contrary 
rests  on  a  popular  instead  of  an  accurate  and  legal  conception 
of  what  the  word  "monopolize"  in  the  statute  means.  I  repeat, 
that  in  my  opinion  there  is  no  attempt  to  monopolize,  and  what, 


THE    NORTHERN    SECURITIES   COMPANY  365 

as  I  have  said,  in  my  judgment  amounts  to  the  same  thing,  that 
there  is  no  combination  in  restraint  of  trade  until  something  is 
done  with  the  intent  to  exclude  strangers  to  the  combination 
from  competing  with  it  in  some  part  of  the  business  which  it 
carries  on. 

Unless  I  am  entirely  wrong  in  my  understanding  of  what  a 
"combination  in  restraint  of  trade"  means,  then  the  same  mo- 
nopoly may  be  attempted  and  effected  by  an  individual,  and  is 
made  equally  illegal  in  that  case  by  §  2.  But  I  do  not  expect 
to  hear  it  maintained  that  Mr.  Morgan  could  be  sent  to  prison 
for  buying  as  many  shares  as  he  liked  of  the  Great  Northern 
and  the  Northern  Pacific,  even  if  he  bought  them  both  at  the 
same  time  and  got  more  than  half  the  stock  of  each  road. 


In  view  of  my  interpretation  of  the  statute  I  do  not  go  further 
into  the  question  of  the  power  of  Congress.  That  has  been 
dealt  with  by  my  brother  White  and  I  concur,  in  the  main,  with 
his  views.  I  am  happy  to  know  that  only  a  minority  of  my 
brethren  adopt  an  interpretation  of  the  law  which,  in  my  opin- 
ion, would  make  eternal  the  bclliim  omnium  contra  omncs  and 
disintegrate  society  so  far  as  it  could  into  individual  atoms.  If 
that  were  its  intent  I  should  regard  calling  such  a  law  a  regula- 
tion of  commerce  as  a  mere  pretence.  It  would  be  an  attempt 
to  reconstruct  society.  I  am  not  concerned  with  the  wisdom  of 
such  an  attempt,  but  I  believe  that  Congress  was  not  intrusted 
by  the  Constitution  with  the  power  to  make  it,  and  I  am  deeply 
persuaded  that  it  has  not  tried. 

Mr.  Justice  White,  with  whom  concur  Mr.  Chief  Justice  Fuller, 
Mr.  Justice  Peckham  and  Mr.  Justice  Holmes,  dissenting: 

The  Northern  Securities  Company  is  a  Xew  Jersey  corpora- 
tion ;  the  Great  Northern  Railway  Company,  a  Minnesota  one; 
and  the  Northern.  Pacific  Railway  Company,  a  Wisconsin  corpo- 
ration. Whilst  in  the  argument  at  bar  the  government  referred 
to  the  subject,  nevertheless  it  expressly  disclaimed  predicating 
any  claim  tor  reliet  upon  the  tact  that  the  predecessor  in  title 
of  the  Northern  Pacific  Railway  Company  was  a  corporation 


366  TRUSTS,    POOLS  AND   CORPORATIONS 

created  by  act  of  Congress.  That  fact,  therefore,  may  be 
eliminated. 

The  facts  essential  to  be  borne  in  mind  to  understand  my 
point  of  view,  without  going  into  details,  are  as  follows  :  the 
lines  of  the  Northern  Pacific  and  the  Great  Northern  Railway 
Companies  are  both  transcontinental,  that  is,  trunk  lines  to  the 
Pacific  Ocean,  —  and  in  some  aspects  are  conceded  to  be  com- 
peting. Mr.  Morgan  and  Mr.  Hill  and  a  few  persons  immedi- 
ately associated  with  them  separately  acquired  and  owned  capital 
stock  of  the  Northern  Pacific  Railway  Company,  aggregating 
a  majority  thereof.  Mr.  Hill  and  others  associated  with  him 
owned,  in  the  same  manner,  about  one-third  of  the  capital  stock 
of  the  Great  Northern  Railway  Company,  the  balance  of  the 
stock  being  distributed  among  about  eighteen  hundred  stock- 
holders. Although  Mr.  Hill  and  his  immediate  associates  owned 
only  one-third  of  the  stock  the  confidence  reposed  in  Mr.  Hill 
was  such  that,  through  proxies,  his  influence  was  dominant  in 
the  affairs  of  that  company.  Under  these  circumstances  Mr. 
Morgan  and  Mr.  Hill  organized  under  the  laws  of  New  Jersey 
the  Northern  Securities  Company.  The  purpose  was  that  the 
company  should  become  the  holder  of  the  stock  of  the  two  rail- 
roads. This  was  to  be  effected  by  having  the  Northern  Securi- 

j  O 

ties  Company  give  its  stock  in  exchange  for  that  of  the  two 
railroad  companies.  Whilst  the  purpose  of  the  promoters  was 
mainly  to  exchange  the  stock  held  by  them  in  the  two  railroads 
for  the  Northern  Securities  Company  stock,  nevertheless  the 
right  of  stockholders  generally  in  the  two  railroads  to  make  a 
similar  exchange  or  to  sell  their  stock  to  the  Securities  Company 
was  provided  for.  Under  the  arrangement  the  Northern  Securi- 
ties Company  came  to  be  the  registered  holder  of  a  majority  of 
the  stock  of  both  the  railroads.  It  is  not  denied  that  the  char- 
ter and  the  acts  clone  under  it,  of  the  Northern  Securities  Com- 
pany, were  authorized  by  the  laws  of  New  Jersey,  and,  therefore, 
in  so  far  as  those  laws  were  competent  to  sanction  the  transac- 
tion, the  corporation  held  the  stock  in  the  two  railroads  secured 
by  the  law  of  the  state  of  its  domicil. 

The  government  by  its  bill  challenges  the  right  of  the  North- 
ern Securities  Company  to  hold  and  own  the  stock  in  the  two 


THE    NORTHERN    SECURITIES   COMPANY  367 

railroads.  The  grounds  upon  which  the  relief  sought  was  based 
were,  generally  speaking,  as  follows  :  That,  as  the  two  railroads 
were  competing  lines  engaged  in  part  in  interstate  commerce, 
the  creation  of  the  Northern  Securities  Company  and  the  acqui- 
sition by  it  of  a  majority  of  the  stock  of  both  roads  was  contrary 
to  the  act  of  Congress  known  as  the  Anti-Trust  Act.  26  Stat.  at 
L.,  209,  chap.  647,  U.  S.  Com  p.  Stat.  1901,  page  3200.  The 
clauses  of  the  act  which  it  was  charged  were  violated  were  the 
first  section,  declaring  illegal  "every  contract,  combination  in 
the  form  of  trust  or  otherwise,  or  conspiracy,  in  restraint  of  trade 
or  commerce  among  the  several  states,  or  with  foreign  nations  "  ; 
and  the  provisions  of  the  second  section,  making  it  a  mis- 
demeanor for  any  person  to  "  monopolize,  or  attempt  to  monopo- 
lize, or  combine  or  conspire  with  any  other  person  or  persons  to 
monopolize,  any  part  of  the  trade  or  commerce  among  the  sev- 
eral states,  or  with  foreign  nations."  The  court  below  sustained 
the  contentions  of  the  government.  It,  therefore,  enjoined  the 
two  railroad  companies  from  allowing  the  Northern  Securities 
Company  to  vote  the  stock  standing  in  its  name  or  to  pay  to 
that  company  any  dividends  upon  the  stock  by  it  held.  On  the 
giving,  however,  of  a  bond  fixed  by  the  court  below  the  decree 
relating  to  the  payment  of  dividends  was  suspended  pending  the 
appeal  to  this  court. 

The  court  recognized,  however,  the  right  of  the  Northern 
Securities  Company  to  re-transfer  the  stock  in  both  railroads  to 
the  persons  from  whom  it  had  been  acquired.  The  correctness 
of  the  decree  below  is  the  question  presented  lor  decision. 

Two  questions  arise.  Does  the  Anti-Trust  Act,  when  rightly 
interpreted,  apply  to  the  acquisition  and  ownership  by  the  North- 
ern Securities  Company  of  the  stock  in  the  two  railroads?  and, 
second,  If  it  does,  had  Congress  the  power  to  regulate  or  control 
such  acquisition  and  ownership  ?  As  the  question  of  power  lies 
at  the  root  of  the  case,  I  come  at  .once  to  consider  that  subject. 
Helore  doing  so.  however,  in  order  to  avoid  being  misled  by  iaise 
or  irrelevant  issues,  it  is  essential  to  brietlv  consider  two  ques- 
tions of  fact.  It  is  said,  first,  that  the  mere  exchange  hv  the 
Northern  Securities  Companv  of  its  stock  for  stock  in  the  rail- 
roads did  not  make  the  Northern  Securities  Company  the  real 


368  TRUSTS,   POOLS  AND   CORPORATIONS 

owner  of  the  stock  in  the  railroads,  since  the  effect  of  the  trans- 
action was  to  cause  the  Securities  company  to  become  merely 
the  custodian  or  trustee  of  the  stock  in  the  railroads ;  second, 
that  as  the  two  railroads  were  both  overcapitalized,  stock  in 
them  furnished  no  sufficient  consideration  for  the  issue  of  the 
stock  of  the  Northern  Securities  Company.  It  would  suffice  to 
point  out  (a),  that  the  proof  shows  that  nearly  nine  million  dol- 
lars was  paid  by  the  Securities  company  for  a  portion  of  the 
stock  acquired  by  it,  and  that,  moreover,  nearly  thirty-five  million 
dollars  was  expended  by  the  Securities  company  in  the  purchase 
of  bonds  of  the  Northern  Pacific  Company,  which  have  been  con- 
verted by  the  Securities  company  into  the  stock  of  that  railroad, 
which  the  Securities  company  now  holds  ;  and  (b\  that  the  mar- 
ket value  of  the  railroad  stocks  is,  moreover,  indisputably  shown 
by  the  proof  to  have  been  equal  to  the  value  fixed  on  them  for 
the  purpose  of  the  exchange  or  purchase  of  such  stock  by  the 
Northern  Securities  Company.  Be  this  as  it  may,  it  is  manifest 
that  these  considerations  can  have  no  possible  influence  on  the 
question  of  the  power  of  Congress  in  the  premises ;  and  there- 
fore the  suggestions  can  serve  only  to  obscure  the  controversy. 
If  the  power  was  in  Congress  to  legislate  on  the  subject  it  be- 
comes wholly  immaterial  what  was  the  nature  of  the  considera- 
tion paid  by  the  company  for  the  stock  by  it  acquired  and  held 
if  such  acquisition  and  ownership,  even  if  real,  violated  the  act 
of  Congress.  If,  on  the  contrary,  the  authority  of  Congress 
could  not  embrace  the  right  of  the  Northern  Securities  Company 
to  acquire  and  own  the  stock,  the  question  of  what  consideration 
the  Northern  Securities  Company  paid  for  the  stock  or  the 
method  by  which  it  was  transferred  must  necessarily  be  beyond 
the  scope  of  the  act  of  Congress. 

In  testing  the  power  of  Congress  I  shall  proceed  upon  the 
assumption  that  the  act  of  Congress  forbids  the  acquisition  of  a 
majority  of  the  stock  of  two  competing  railroads  engaged  in  part 
in  interstate  commerce  by  a  corporation  or  any  combination  of 
persons. 


The  plenary  authority  of  Congress  over  interstate  commerce, 


THE    NORTHERN    SECURITIES   COMPANY  369 

its  right  to  regulate  it  to  the  fullest  extent,  to  fix  the  rates  to  be 
charged  for  the  movement  of  interstate  commerce,  to  legislate 
concerning  the  ways  and  vehicles  actually  engaged  in  such 
traffic,  and  to  exert  any  and  every  other  power  over  such  com- 
merce which  flows  from  the  authority  conferred  by  the  Constitu- 
tion, is  thus  conceded.  But  the  concessions  thus  made  do  not 
concern  the  question  in  this  case,  which  is  not  the  scope  of  the 
power  of  Congress  to  regulate  commerce,  but  whether  the  power 
extends  to  regulate  the  ownership  of  stock  in  railroads,  which  is 
not  commerce  at  all.  The  confusion  which  results  from  failing 
to  observe  this  distinction  will  appear  from  an  accurate  analysis 
of  Gibbons  v.  Ogden,  for  in  that  case  the  great  Chief  Justice  was 
careful  to  define  the  commerce  the  power  to  regulate  which  was 
conferred  upon  Congress,  and  in  the  passages  which  I  have 
previously  quoted,  simply  pointed  out  the  rule  by  which  it  was 
to  be  determined  in  any  case  whether  Congress,  in  acting  upon 
the  subject,  had  gone  beyond  the  limits  of  the  power  to  regulate 
commerce  as  it  was  defined  in  the  opinion.  Accepting  the  test 
announced  in  Gibbons  v.  Ogdcn  for  determining  whether  a  given 
exercise  of  the  power  to  regulate  commerce  has  in  effect  tran- 
scended the  limits  of  regulation,  it  is  essential  to  accept  also  the 
luminous  definition  of  commerce  announced  in  that  case  and 
approved  so  many  times  since,  and  hence  to  test  the  question 
for  decision  by  that  definition.  The  definition  is  this:  "Com- 
merce undoubtedly  is  traffic,  but  it  is  something  more,  —  it  is 
intercourse.  It  describes  the  commercial  intercourse  between 
nations  and  parts  of  nations  in  all  its  branches,  and  is  regulated 
b\>  prescribing  rules  for  carrying  on-  tJiat  intercourse"  (Italics 
mine.) 

Does  the  delegation  of  authority  to  Congress  to  regulate  com- 
merce among  the  states  embrace  the  power  to  regulate  the  own- 
ership of  stock  in  state  corporations,  because  such  corporations 
may  be  in  part  engaged  in  interstate  commerce  ?  Certainly  not, 
if  such  question  is  to  be  governed  by  the  definition  of  commerce 
just  quoted  from  Gibbons  v.  Ogden.  Let  me  analyze  the  defini- 
tion. "  Commerce  undoubtedly  is  traffic,  but  it  is  something 
more.  —  it  is  intercourse;  "  that  is,  traffic  between  the  states  and 
intercourse  between  the  states.  I  think  the  ownership  of  stock 


3/0  TRUSTS,   POOLS   AND   CORPORATIONS 

in  a  state  corporation  cannot  be  said  to  be  in  any  sense  traffic 
between  the  states  or  intercourse  between  them.  The  defini- 
tion continues,  "  It  describes  the  commercial  intercourse  between 
nations  and  parts  of  nations."  Can  the  ownership  of  stock  in 
a  state  corporation,  by  the  most  latitudinarian  construction, 
be  embraced  by  the  words  "  commercial  intercourse  between 
nations  and  parts  of  nations  "  ?  And  to  remove  all  doubt,  the 
definition  points  out  the  meaning  of  the  delegation  of  power  to 
regulate,  since  it  says  that  it  is  to  be  "  regulated  by  prescribing 
rules  for  carrying  on  that  intercourse."  Can  it  in  reason  be 
maintained  that  to  prescribe  rules  governing  the  ownership  of 
stock  within  a  state,  in  a  corporation  created  by  it,  is  within  the 
power  to  prescribe  rules  for  the  regulation  of  intercourse  between 
citizens  of  different  states  ? 

But  if  the  question  be  looked  at  with  reference  to  the  powers 
of  the  Federal  and  state  governments,  —  the  general  nature  of 
the  one  and  the  local  character  of  the  other  which  it  was  the 
purpose  of  the  Constitution  to  create  and  perpetuate,  —  it  seems 
to  me  evident  that  the  contention  that  the  authority  of  the 
national  government  under  the  commerce  clause  gives  the  right 
to  Congress  to  regulate  the  ownership  of  stock  in  railroads 
chartered  by  state  authority  is  absolutely  destructive  of  the 
loth  Amendment  to  the  Constitution,  which  provides  that  "the 
powers  not  delegated  to  the  United  States  by  the  Constitution, 
nor  prohibited  by  it  to  the  states,  are  reserved  to  the  states 
respectively  or  to  the  people."  This  must  follow,  since  the 
authority  of  Congress  to  regulate  on  the  subject  can,  in  reason, 
alone  rest  upon  the  proposition  that  its  power  over  commerce 
embraces  the  right  to  control  the  ownership  of  railroads  doing 
in  part  an  interstate  commerce  business.  But  power  to  control 
the  ownership  of  all  such  railroads  would  necessarily  embrace 
their  organization.  Hence  it  would  result  that  it  would  be  in 
the  power  of  Congress  to  abrogate  every  such  railroad  charter 
granted  by  the  states  from  the  beginning  if  Congress  deemed 
that  the  rights  conferred  by  such  state  charters  tended  to  restrain 
commerce  between  the  states  or  to  create  a  monopoly  concern- 
ing the  same. 

Besides,  if  the  principle  be  acceded  to  it  must  in  reason  be 


THE   NORTHERN    SECURITIES   COMPANY  371 

held  to  embrace  every  consolidation  of  state  railroads  which  may 
do  in  part  an  interstate  commerce  business,  even  although  such 
consolidation  may  have  been  expressly  authorized  by  the  laws  of 
the  states  creating  the  corporations. 

It  would  likewise  overthrow  every  state  law  forbidding  such 
consolidations ;  for  if  the  ownership  of  stock  in  state  corpora- 
tions be  within  the  regulating  power  of  Congress  under  the  com- 
merce clause,  and  can  be  prohibited  by  Congress,  it  would  be 
within  the  power  of  that  body  to  permit  that  which  it  had  the 
right  to  prohibit. 

But  the  principle  that  the  ownership  of  property  is  embraced 
within  the  power  of  Congress  to  regulate  commerce,  whenever 
that  body  deems  that  a  particular  character  of  ownership,  if 
allowed  to  continue,  may  restrain  commerce  between  the  states 
or  create  a  monopoly  thereof,  is,  in  my  opinion,  in  conflict  with 
the  most  elementary  conceptions  of  rights  of  property.  For  it 
would  follow  if  Congress  deemed  that  the  acquisition  by  one 
or  more  individuals  engaged  in  interstate  commerce  of  more 
than  a  certain  amount  of  property  would  be  prejudicial  to  inter- 
state commerce,  the  amount  of  property  held  or  the  amount 
which  could  be  employed  in  interstate  commerce  could  be  regu- 
lated. 

******** 

It  is  said,  moreover,  that  the  decision  of  this  case  does  not 
involve  the  consequences  above  pointed  out  since  the  only  issue 
in  this  case  is  the  right  of  the  Northern  Securities  Company  to 
acquire  and  own  the  stock.  The  right  of  that  company  to  do 
so,  it  is  argued,  is  one  thing;  the  power  of  individuals  or  corpo- 
rations, when  not  merely  organized  to  hold  stock,  an  entirely 
different  thing.  My  mind  fails  to  seize  the  distinction.  The 
only  premise  by  which  the  power  of  Congress  can  be  extended 
to  the  subject-matter  of  the  right  of  the  Securities  company  to 
own  the  stock  must  be  the  proposition  that  such  ownership  is 
within  the  legislative  power  of  Congress,  and  if  that  proposition 
be  admitted  it  is  not  perceived  by  what  process  of  reasoning 
power  of  Congress  over  the  subject-matter  of  ownership  is  to  be 
limited  to  ownership  by  particular  classes  of  corporations  or  per- 
sons. If  the  power  embraces  ownership,  then  the  authority  of 


372  TRUSTS,   POOLS  AND   CORPORATIONS 

Congress  over  all  ownership  which,  in  its  judgment,  may  affect 
interstate  commerce,  necessarily  exists.  In  other  words,  the 
logical  result  of  the  asserted  distinction  amounts  to  one  of  two 
things :  Either  that  nothing  is  decided,  or  that  a  decree  is  to  be 
entered  having  no  foundation  upon  which  to  rest.  This  is  said 
because,  if  the  control  of  the  ownership  of  stock  in  competing 
roads  by  one  and  the  same  corporation  is  within  the  power  of 
Congress,  and  creates  a  restraint  of  trade  or  monopoly  forbidden 
by  Congress,  it  is  not  conceivable  to  me  how  exactly  similar 
ownership  by  one  or  more  individuals  would  not  create  the  same 
restraint  or  monopoly,  and  be  equally  within  the  prohibition' 
which  it  is  decided  Congress  has  imposed.  Besides  the  incon- 
gruity of  the  conclusion,  resulting  from  the  alleged  distinction, 
to  admit  it  would  do  violence  to  both  the  letter  and  spirit  of  the 
Constitution ;  since  it  would  in  effect  hold  that,  although  a  par- 
ticular act  was  a  burden  upon  interstate  commerce  or  a  monopoly 
thereof,  that  individuals  could  lawfully  do  the  act,  provided  only 
they  did  not  use  the  instrumentality  of  a  corporation.  But  this 
court  long  since  declared  that  the  power  to  regulate  commerce, 
conferred  upon  Congress,  was  "general  and  includes  alike  com- 
merce by  individuals,  partnerships,  associations  and  corpora- 
tions." Panlv.  Virginia,  8  Wall.,  168,  183,  19  L.  ed.,  357,  361. 

Indeed,  the  natural  reluctance  of  the  mind  to  follow  an  erro- 
neous principle  to  its  necessary  conclusion,  and  thus  to  give 
effect  to  a  grievous  wrong  arising  from  the  erroneous  principle, 
is  an  admonition  that  the  principle  itself  is  wrong.  That  ad- 
monition, I  submit,  is  conclusively  afforded  by  the  decree  which 
is  now  affirmed.  Without  stopping  to  point  out  what  seems  to 
me  to  be  the  confusion,  contradiction  and  denial  of  rights  of 
property  which  the  decree  exemplifies,  let  me  see  if,  in  effect, 
it  is  not  at  war  with  itself  and  in  conflict  with  the  principle  upon 
which  it  is  assumed  to  be  based. 

Fundamentally  considered,  the  evil  sought  to  be  remedied  is 
the  restraint  of  interstate  commerce  and  the  monopoly  thereof, 
alleged  to  have  been  brought  about  through  the  acquisition  by 
Mr.  Morgan  and  Mr.  Hill  and  their  friends  and  associates,  of  a 
controlling  interest  in  the  stock  of  both  the  roads.  And  yet  the 
decree,  whilst  forbidding  the  use  of  the  stock  by  the  Northern 


THE   NORTHERN   SECURITIES   COMPANY  373 

Securities  Company,  authorizes  its  return  to  the  alleged  con- 
spirators, and  does  not  restrain  them  from  exercising  the  control 
resulting  from  the  ownership.  If  the  conspiracy  and  combina- 
tion existed  and  was  illegal,  my  mind  fails  to  perceive  why  it 
should  be  left  to  produce  its  full  force  and  effect  in  the  hands 
of  the  individuals  by  whom  it  was  charged  the  conspiracy  was 
entered  into. 

It  may,  however,  be  said  that  even  if  the  results  which  I  have 
indicated  be  held  necessarily  to  arise  from  the  principles  con- 
tended for  by  the  government,  it  does  not  follow  that  such  power 
would  ever  be  exerted  by  Congress,  or,  if  exerted,  would  be  en- 
forced to  the  detriment  of  charters  granted  by  the  states  to  rail- 
roads or  consolidations  thereof,  effected  under  state  authority, 
or  the  ownership  of  stock  in  such  railroads  by  individuals,  or 
the  rights  of  individuals  to  acquire  property  by  purchase,  lease 
or  otherwise,  and  to  make  any  and  all  contracts  concerning 
property  which  may  thereafter  become  the  subject-matter  of 
interstate  commerce.  The  first  suggestion  is  at  once  met  by 
the  consideration  that  it  has  been  decided  by  this  court  that,  as 
the  Anti-Trust  Act  forbids  any  restraint,  it  therefore  embraces 
even  reasonable  contracts  or  agreements.  If,  then,  the  owner- 
ship of  the  stock  of  the  two  railroads  by  the  Northern  Securities 
Company  is  repugnant  to  the  act,  it  follows  that  ownership, 
whether  by  the  individual  or  another  corporation,  would  be 
equally  within  the  prohibitions  of  the  act.  As  to  the  second, 
true  it  is  that  by  the  terms  of  the  Anti-Trust  Act  the  power  to 
put  its  provisions  in  motion  is,  as  to  many  particulars,  confided  to 
the  highest  law  officer  of  the  government;  and  if  that  officer  did 
not  invoke  the  aid  of  the  courts  to  restrain  the  rights  of  the  rail- 
roads previously  chartered  by  the  states  to  enjoy  the  benefits 
conferred  upon  them  by  state  legislation,  or  to  prevent  individ- 
uals from  exercising  their  right  of  ownership  and  contract,  the 
law  in  these  respects  would  remain  a  dead  letter.  But  to  indulge 
in  this  assumption  would  be  but  to  say  that  the  law  would  not 
be  enforced  by  the  highest  law  officer  of  the  government,— 
a  conclusion  which,  of  course,  could  not  be  indulged  in  for  a 
moment.  In  any  view,  such  suggestion  but  involves  the  propo- 
sition that  vast  rights  of  property,  instead  of  resting  upon  con- 


374  TRUSTS,   POOLS  AND   CORPORATIONS 

stitutional  and  legal  sanction,  must  alone  depend  upon  whether 
an  executive  officer  might  elect  to  enforce  the  law,  —  a  conclu- 
sion repugnant  to  every  principle  of  liberty  and  justice. 

Having  thus  by  the  light  of  reason  sought  to  show  the  un- 
soundness  of  the  proposition  that  the  power  of  Congress  to 
regulate  commerce  extends  to  controlling  the  acquisition  and 
ownership  of  stock  in  state  corporations,  railroad  or  otherwise, 
because  they  may  be  doing  an  interstate  commerce  business,  or 
to  the  consolidation  of  such  companies  under  the  sanction  of 
state  legislation,  or  to  the  right  of  the  citizen  to  enjoy  his  free- 
dom of  contract  and  ownership,  let  me  now  endeavor  to  show, 
by  a  review  of  the  practices  of  the  governments,  both  state  and 
national,  from  the  beginning,  and  the  adjudications  of  this  court, 
how  wanting  in  merit  is  the  proposition  contended  for.  It  may 
not  be  doubted  that  from  the  foundation  of  the  government,  at  all 
events  to  the  time  of  the  adoption  of  the  Anti-Trust  Act  in  1890, 
there  was  an  entire  absence  of  any  legislation  by  Congress  even 
suggesting  that  it  was  deemed  by  any  one  that  power  was  pos- 
sessed by  Congress  to  control  the  ownership  of  stock  in  railroad 
or  other  corporations  because  such  corporations  engaged  in 
interstate  commerce.  On  the  contrary,  when  Congress  came 
to  exert  its  authority  to  regulate  interstate  commerce  as  carried 
on  by  railroads,  manifested  by  the  adoption  of  the  Interstate 
Commerce  Act  (24  Stat.  at  L.,  379,  chap.  104,  U.  S.  Comp.  Stat. 
1901,  page  3154),  it  sedulously  confined  the  provisions  of  that  act 
to  the  carrying  on  of  interstate  commerce  itself,  including  the 
reasonableness  of  the  rates  to  be  charged  for  carrying  on  such 
commerce  and  other  matters  undeniably  concerning  the  fact  of 
interstate  commerce.  The  same  conception  was  manifested  sub- 
sequently in  legislation  concerning  safety  appliances  to  be  used 
by  railroads,  since  the  provisions  of  the  act  were  confined  to  such 
appliances  when  actually  employed  in  the  business  of  interstate 
commerce.  27  Stat.  at  L.,  531,  chap.  196,  U.  S.  Comp.  Stat.  1901, 
page  3174.  It  also  may  not  be  doubted  that  from  the  begin- 
ning the  various  states  of  the  Union  have  treated  the  incorpora- 
tion and  organization  of  railroad  companies  and  the  ownership 
of  stock  therein  as  matters  within  their  exclusive  authority. 
Under  this  conception  of  power  in  the  states,  universally  pre- 


THE    NORTHERN    SECURITIES   COMPANY  375 

vailing  and  always  acted  upon,  the  entire  railroad  system  of  the 
United  States  has  been  built  up.  Charters,  leases  and  consoli- 
dations under  the  sanction  of  state  laws  lie  at  the  basis  of  that 
enormous  sum  of  property  and  those  vast  interests  represented 
by  the  railroads  of  the  United  States.  Extracts  from  the  reports 
of  the  Interstate  Commerce  Commission  and  from  a  standard 
authority  on  the  subject,  which  were  received  in  evidence,  dem- 
onstrate that  in  effect  nearly  every  great  railroad  system  in  the 
United  States  is  the  result  of  the  consolidation  and  unification 
of  various  roads,  often  competitive,  such  consolidation  or  unifi- 
cation of  management  having  been  brought  about  in  every 
conceivable  form,  sometimes  by  lease  under  state  authority, 
sometimes  by  such  leases  made  where  there  was  no  prohibition 
against  them,  and  by  stock  acquisitions  made  by  persons  or  cor- 
porations in  order  to  acquire  a  controlling  interest  in  both  roads. 
Without  stopping  to  recite  details  on  the  subject,  I  content  my- 
self with  merely  mentioning  a  few  of  the  instances  where  great 
systems  of  railroad  have  been  formed  by  the  unification  of  the 
management  of  competitive  roads,  by  consolidation  or  other- 
wise, often  by  statutory  authority.  These  instances  embrace  the 
Boston  &  Maine  system,  the  New  York,  New  Haven  &  Hart- 
ford, the  New  York  Central,  the  Reading  and  the  Pennsylvania 
systems.  One  of  the  illustrations  —  as  to  the  New  York  Central 
system  —  is  the  case  of  the  Hudson  River  Railroad  on  one  side 
of  the  Hudson  River  and  the  West  Shore  Railroad  on  the  other, 
—  both  parallel  roads  and  directly  competitive,  and  both  united 
in  one  management  by  authority  of  a  legislative  act.  It  is  indeed 
remarkable,  if  the  whole  subject  was  within  the  paramount  power 
of  Congress,  and  not  within  the  authority  of  the  states,  that  there 
should  have  been  a  universal  understanding  to  the  contrary  from 
the  beginning.  When  it  is  borne  in  mind  that  such  universal 
action  related  to  interests  of  the  most  vital  character,  involving 
property  of  enormous  amount,  concerning  the  welfare  of  the 
whole  people,  it  is  impossible  in  reason  to  deny  the  soundness 
of  the  assumption  that  it  was  the  universal  conviction  that  the 
states,  and  not  Congress,  had  control  of  the  subject-matter  of 
the  organization  and  ownership  of  railroads  created  by  the  states- 
And  the  same  inference  is  applicable  to  the  condition  of  things 


3/6  TRUSTS,   POOLS  AND   CORPORATIONS 

which  has  existed  since  the  adoption  of  the  Anti-Trust  Act  in 
1890.  Who  can  deny  that  from  that  date  to  this,  consolidations 
and  unification  of  management,  by  means  of  leases,  stock  owner- 
ship by  individuals  or  corporations,  have  been  carried  on,  when 
not  prohibited  by  state  laws,  to  a  vast  extent  and  that  during  all 
this  time,  despite  the  energy  of  the  government  in  invoking  the 
anti-trust  law,  that  no  assertion  of  power  in  Congress  under  that 
act  to  control  the  ownership  of  stock  was  ever  knowingly  made 
until  first  asserted  in  this  cause.  Quite  recently  Congress  has 
amended  the  Interstate  Commerce  Act  by  provisions  deemed 
essential  to  make  its  prohibitions  more  practically  operative, 
and  yet  no  one  of  such  provisions  lend  themselves  even  to  the 
inference  that  it  was  deemed  by  any  one  that  the  power  of  Con- 
gress extended  to  the  control  of  stock  ownership.  Certainly  the 
states  have  not  so  considered  it.  As  a  matter  of  public  history 
it  is  to  be  observed  that  not  long  since,  by  authority  of  the  legis- 
lature of  the  state  of  Massachusetts,  a  controlling  interest  by 
lease  of  the  Boston  &  Albany  road  passed  to  the  New  York 
Central  system. 

The  decisions  of  this  court  to  my  mind  leave  no  room  for 
doubt  on  the  subject.  As  I  have  already  shown,  the  very  defi- 
nition of  the  power  to  regulate  commerce,  as  announced  in  Gib- 
bons v.  Ogdcu,  excludes  the  conception  that  it  extends  to  stock 
ownership.  I  shall  not  stop  to  review  a  multitude  of  decisions 
of  this  court  concerning  interstate  commerce,  which,  whilst  up- 
holding the  paramount  authority  of  Congress  over  that  subject, 
at  the  same  time  treated  it  as  elementary  that  the  effect  of  the 
power  over  commerce  between  the  states  was  not  to  deprive  the 
states  of  their  right  to  legislate  concerning  the  ownership  of  prop- 
erty of  every  character  or  to  create  railroad  corporations  and  to 
endow  them  with  such  powers  as  were  deemed  appropriate,  or 
to  deprive  the  individual  of  his  freedom  to  acquire,  own  and 
enjoy  property  by  descent,  contract  or  otherwise,  because  rail- 
roads or  other  property  might  become  the  subject  of  interstate 
commerce. 

*####*## 
Now,   it  is  submitted,  that  the  decided  cases  just  reviewed 


THE    NORTHERN    SECURITIES   COMPANY  377 

demonstrate  that  the  acquisition  and  ownership  of  stock  in  com- 
peting railroads,  organized  under  state  law,  by  several  persons 
or  by  corporations,  is  not  interstate  commerce,  and,  therefore, 
not  subject  to  the  control  of  Congress.  It  is,  indeed,  suggested 
that  the  cases  establish  a  contrary  doctrine.  This  is  sought  to 
be  demonstrated  by  quoting  passages  from  the  opinions  sepa- 
rated from  their  context,  apart  from  the  questions  which  the 
cases  involved.  But  as  the  issues  which  were  decided  in  the 
Knight,  in  the  Pearsall,  in  the  Louisville  &  Nashville  case  and 
in  the  Hopkins  case  directly  exclude  the  significance  attributed 
to  the  passages  from  the  opinions  in  those  cases  relied  upon, 
it  must  follow  that  if  such  passages  could,  when  separated  from 
their  context,  have  the  meaning  attributed  to  them  the  expres- 
sions would  be  mere  obiter.  And  this  consideration  renders  it 
unnecessary  for  me  to  analyze  the  passages  to  show  that  when 
they  are  read  in  connection  with  their  context  they  have  not  the 
meaning  now  sought  to  be  attached  to  them.  Hut  other  consid- 
erations equally  render  it  unnecessary  to  particularly  review  the 
sentences  relied  upon.  There  can  be  no  doubt  that  it  was  ex- 
pressly decided  in  the  Knight  case  that  the  acquisition  of  stock 
by  one  corporation  in  other  corporations  so  as  to  control  them 
all  was  not  interstate  commerce,  altliongJi  tJic  goods  of  tlic  manu- 
facturing companies  wJiose  stock  was  acquired  migJit  become  tlie 
subject  of  interstate  commerce.  If,  then,  the  passage  from  the 
Knight  case  could  be  given  the  meaning  sought  to  be  affixed  to 
it,  the  result  would  be  but  to  say  that  that  case  overruled  itself. 
And  this  would  be  the  result  in  the  Pearsall  case,  since  in  that 
case  it  was  decided  that  the  states  had  the  power  to  forbid  the 
consolidation  of  competing  railroads,  even  by  means  of  the 
acquisition  of  stock.  Besides,  as  in  the  Louisville  &  Nashville 
case,  immediately  following  the  Pearsall,  it  was  expressly  de- 
cided that  the  interstate  commerce  power  of  Congress  did  not 
embrace  such  consolidation,  and  Congress,  therefore,  could  not 
restrain  a  state  from  either  forbidding  or  permitting  it  to  take 
place,  it  would  follow  that  if"  the  sentences  in  the  Pearsall  case 
had  the  import  now  applied  to  them,  that  that  ease  not  only 
overruled  itself,  but  was  besides  overruled  by  the  Louisville  & 
Nashville  ease,  and  tin's  although  the  two  eases  were  decided  on 


3/8  TRUSTS,   POOLS   AND   CORPORATIONS 

the  same  day,  the  opinions  in  both  cases  having  been  delivered 
by  the  same  justice. 

The  same  confusion  and  contradiction  arises  from  separating 
from  their  context  and  citing  as  applicable  to  this  case  passages 
from  the  opinions  in  the  Freight  Association  and  Joint  Traffic 
cases.  Those  cases,  as  I  have  previously  stated,  related  exclu- 
sively to  a  contract  admittedly  involving  interstate  commerce, 
and  it  was  decided  that  any  restraint  of  such  commerce  was  for- 
bidden by  the  Anti-Trust  Act.  Now,  in  the  Hopkins  case,  decided 
subsequent  to  the  Freight  Association  and  Joint  Traffic  cases, 
the  contract  considered  unquestionably  involved  a  restraint,  but, 
as  such  restraint  did  not  concern  interstate  commerce,  it  was 
held  not  to  come  within  the  power  of  Congress.  It  would  follow 
then,  if  the  sentences  quoted  from  the  opinions  in  the  Freight 
Association  and  Joint  Traffic  cases,  which  cases  concerned  only 
that  which  was  completely  interstate  commerce,  applied  to  that 
which  was  not  such  commerce,  that  the  Hopkins  case  overruled 
both  these  cases,  although  the  opinions  in  all  of  the  cases  were 
delivered  by  the  same  justice,  and  no  intimation  was  suggested 
of  such  overruling.  It  would  also  result  that,  after  having  over- 
ruled those  cases  in  the  Hopkins  case,  the  court,  in  expressing 
its  opinion  through  the  same  justice,  proceeded  in  the  Addyston 
Pipe  case,  which  related  only  to  interstate  commerce,  to  over- 
rule the  Hopkins  case  and  reaffirm  the  prior  cases. 

Of  course,  in  my  opinion,  there  is  no  ground  for  holding  that 
the  decided  cases  embody  such  extreme  contradictions  or  pro- 
duce such  utter  confusion.  The  cases  are  all  consistent,  if  only 
the  elementary  distinction  upon  which  they  proceeded  be  not 
obscured, — that  is,  the  difference  which  arises  from  the  power 
of  Congress  to  regulate  interstate  commerce,  on  the  one  hand, 
and  its  want  of  authority,  on  the  other,  to  regulate  that  which  is 
not  interstate  commerce.  Indeed,  the  confounding  and  treating 
as  one,  things  which  are  wholly  different,  is  the  error  permeat- 
ing all  the  contentions  for  the  irovernment. 


The  fallacy  of  all  the  contentions  of  the  government  is,  to  my 
mind,  illustrated  by  the  summing  up  of  the  case  for  the  govern- 


THE    NORTHERN    SECURITIES   COMPANY  379 

ment  made  in  the  argument  at  bar.  The  right  to  acquire  and 
own  the  stock  of  competing  railroads  involves,  says  that  sum- 
ming up,  the  power  of  an  individual  "  to  do  "  (italics  mine)  abso- 
lutely as  he  pleases  with  his  own,  whilst  the  claim  of  the 
government  is  that  the  right  of  the  owner  of  property  "to  do" 
(italics  mine)  as  he  pleases  with  his  own  may  be  controlled  in 
the  public  interest  by  legitimate  legislation.  But  the  case  in- 
volves the  right  to  acquire  and  own,  not  the  right  "  to  do  "  (italics 
mine).  Confusing  the  two  gives  rise  to  the  errors  which  it  has 
been  my  endeavor  to  point  out.  Undoubtedly  the  states  possess 
power  over  corporations  created  by  them,  to  permit  or  forbid 
consolidation,  whether  accomplished  by  stock  ownership  or 
otherwise,  to  forbid  one  corporation  from  holding  stock  in  an- 
other, and  to  impose  on  this  or  other  subjects  such  regulations 
as  may  be  deemed  best.  Generally  speaking,  however,  the  right 
to  do  these  things  springs  alone  from  the  fact  that  the  corpora- 
tion is  created  by  the  state,  and  holds  its  rights  subject  to  the 
conditions  attached  to  the  grant,  or  to  such  regulations  as  the 
creator,  the  state,  may  lawfully  impose  upon  its  creature,  the  cor- 
poration. Moreover,  irrespective  of  the  relation  of  creator  and 
creature,  it  is,  of  course,  true  in  a  general  sense  that  government 
possesses  the  authority  to  regulate,  within  certain  just  limits, 
what  an  owner  may  do  with  his  property.  But  the  first  power 
which  arises  from  the  authority  of  a  grantor  to  exact  conditions 
in  making  a  grant  or  to  regulate  the  conduct  of  the  grantee  gives 
no  sanction  to  the  proposition  that  a  government,  irrespective  of 
its  power  to  grant,  has  the  general  authority  to  limit  the  charac- 
ter and  quantity  of  property  which  may  be  acquired  and  owned. 
And  the  second  power,  the  general  governmental  one,  to  reason- 
ably control  the  use  of  property,  affords  no  foundation  for  the 
proposition  that  there  exists  in  government  a  power  to  limit  the 
quantity  and  character  of  property  which  may  be  acquired  and 
owned.  The  difference  between  the  two  is  that  which  exists 
between  a  free  and  constitutional  government,  restrained  by  law, 
an  absolute  government,  unrestrained  by  any  of  the  principles 
which  are  necessary  tor  the  perpetuation  of  society,  and  the 
protection  of  life,  liberty  and  property. 

It    cannot  be  denied  that   the   sum  of   all  just  governmental 
* 


380  TRUSTS,   POOLS  AND   CORPORATIONS 

power  was  enjoyed  by  the  states  and  the  people  before  the  Con- 
stitution of  the  United  States  was  formed.  None  of  that  power 
was  abridged  by  that  instrument  except  as  restrained  by  consti- 
tutional safeguards,  and  hence  none  was  lost  by  the  adoption  of 
the  Constitution.  The  Constitution,  whilst  distributing  the  pre- 
existing authority,  preserved  it  all.  With  the  full  power  of  the 
states  over  corporations  created  by  them  and  with  their  author- 
ity in  respect  to  local  legislation,  and  with  power  in  Congress 
over  interstate  commerce  carried  to  its  fullest  degree,  I  cannot 
conceive  that  if  these  powers,  admittedly  possessed  by  both,  be 
fully  exerted,  a  remedy  cannot  be  provided  fully  adequate  to 
suppress  evils  which  may  arise  from  combinations  deemed  to  be 
injurious.  This  must  be  true  unless  it  be  concluded  that,  by  the 
effect  of  the  mere  distribution  of  power  made  by  the  Constitu- 
tion, partial  impotency  of  governmental  authority  has  resulted. 
But  if  this  be  conceded,  argncndo,  the  Constitution  itself  has 
pointed  out  the  method  by  which,  if  changes  are  needed,  they 
may  be  brought  about.  No  remedy,  in  my  opinion,  for  any  sup- 
posed or  real  infirmity,  can  be  afforded  by  disregarding  the 
Constitution,  by  destroying  the  lines  which  separate  state  and 
Federal  authority,  and  by  implying  the  existence  of  a  power 
which  is  repugnant  to  all  those  fundamental  rights  of  life,  lib- 
erty and  property  upon  which  just  government  must  rest. 

If,  however,  the  question  of  the  power  of  Congress  be  con- 
ceded, and  the  assumption  as  to  the  meaning  of  the  Anti-Trust 
Act  which  has  been  indulged  in  for  the  purpose  of  considering 
that  power  be  put  out  of  view,  it  would  yet  remain  to  be  deter- 
mined whether  the  Anti-Trust  Act  embraced  the  acquisition  and 
ownership  of  the  stock  in  question  by  the  Northern  Securities 
Company.  It  is  unnecessary  for  me,  however,  to  state  the  rea- 
sons which  have  led  me  to  the  conclusion  that  the  act,  when 
properly  interpreted,  does  not  embrace  the  acquisition  and  own- 
ership of  such  stock,  since  that  subject  is  considered  in  an  opin- 
ion of  Mr.  Justice  Holmes,  which  explains  the  true  interpretation 
of  the  statute,  as  it  is  understood  by  me,  more  clearly  than  I 
would  be  able  to  do. 

Being  of  the  opinion,  for  the  reasons  heretofore  given,  that 
Congress  was  without  power  to  regulate  the  acquisition  and 


THE   NORTHERN    SECURITIES   COMPANY  381 

ownership  of  the  stock  in  question  by  the  Northern  Securities 
Company,  and  because  I  think  even  if  there  were  such  power  in 
Congress,  it  has  not  been  exercised  by  the  Anti-Trust  Act,  as  is 
shown  in  the  opinion  of  Mr.  Justice  Holmes,  I  dissent. 

I  am  authorized  to  say  that  the  Chief  Justice,  Mr.  Justice 
Peckham,  and  Mr.  Justice  Holmes  concur  in  this  dissent. 

After  this  disapproval  of  the  merger,  by  the  Supreme  Court,  it  became  neces- 
sary to  dissolve  the  company.  The  Morgan-Hill  party  in  control  proceeded 
to  divide  the  assets  of  the  company  pro  rata  among  the  owners.  The  practi- 
cal result  would  have  been  that  a  majority  of  the  stock  of  the  Northern  Pacific 
Co.  would  have  remained  in  the  hands  of  the  Great  Northern's  owners.  To 
this  plan  the  Harriman  interests,  representing  the  Union  and  Southern  Pacific 
Companies,  objected,  demanding  the  return  of  the  same  securities,  with  control 
of  the  Northern  Pacific,  which  they  had  turned  in  originally,  after  having 
secured  such  control  in  May,  1901.  An  injunction  against  the  Morgan-Hill 
plan  of  dissolution  was  obtained  on  July  15.  1904.  This  injunction  was  dis- 
solved in  favor  of  the  Hill  party  by  the  Federal  Appellate  Court,  Jan.  4,  1905  ; 
and  now  goes  to  the  Supreme  Court  for  final  decision.  Upon  this  decision 
the  question  of  final  control  of  the  Northern  Pacific  Railroad  by  its  transcon- 
tinental rivals  depends.  —  Eu. 


XV 

THE    MASSACHUSETTS    BUSINESS    CORPORATION 

LAW1 

THE  Massachusetts  Business  Corporation  Law,  enacted  by 
the  legislature  of  1903,  has  been  the  subject  of  discussion 
and  criticism  by  no  means  limited  to  the  state.  The  charge  has 
been  made  that  in  the  enactment  of  this  code  the  conservative 
state  of  Massachusetts  has  at  last  surrendered  to  the  demands 
of  promoters,  and  has  joined  the  states  which  vie  with  each 
other  in  bidding  for  the  privilege  of  giving  charters  to  irrespon- 
sible corporations.  It  is  the  purpose  of  this  article  first  very 
briefly  to  point  out  the  causes  leading  to  the  enactment  of  a  new 
corporation  law  in  Massachusetts,  and  .then  to  discuss  those 
features  of  the  law  which  distinguish  it  from  the  more  recently 
enacted  corporation  laws  of  other  states  and  to  indicate  its  prob- 
able influence  upon  the  organization  and  legislative  regulation 
of  industrial  corporations. 

The  fundamental  reason  for  the  enactment  of  the  new  law  is 
to  be  found  in  the  defects  of  the  previous  legislation  of  the 
state  relating  to  business  corporations.  The  groundwork  of 
this  legislation  had  survived  nearly  a  hundred  years  since  the 
earliest  legislative  regulation  of  such  forms  of  organization. 
Successive  amendments  permitting  incorporation  without  special 
act  of  the  legislature,  the  payment  of  stock  in  property  as  well 
as  in  cash,  and  finally,  as  to  certain  classes  of  corporations,  an 
unlimited  capitalization,  were  obvious  concessions  to  the  de- 
mands of  developing  business  methods.  These  amendments 
left  the  law,  however,  in  form  a  mere  patchwork,  and  in  sub- 
stance neither  a  real  protection  to  stockholders  or  investors  nor 
sufficiently  liberal  in  some  respects  to  attract  the  incorporation 

1  Frum  the  Quarterly  Journal  of  Economics,  Vol.  XVIII,  1904,  pp.  269-280. 

382 


MASSACHUSETTS   BUSINESS  CORPORATION    LAW     383 

of  business  enterprises  organized  and  financed  in  the  state. 
During  the  past  five  years  the  advantages  offered  by  the  more 
liberal  corporation  laws  of  other  states  have  been  availed  of  to 
a  constantly  increasing  extent  until  in  the  year  1901  two  business 
corporations  were  organized  under  a  foreign  charter  for  the  pur- 
pose of  doing  business  in  Massachusetts  for  every  such  corpora- 
tion organized  under  the  laws  of  the  state. 

Business  men  felt  a  certain  degree  of  resentment  in  being 
advised  to  organize  their  corporations  outside  of  their  own  state, 
and  a  movement  was  set  on  foot  in  the  early  months  of  1902 
to  secure,  if  possible,  some  relief.  Under  a  legislative  resolve 
passed  in  that  year,  Governor  Crane  appointed  a  special  com- 
mittee on  Corporation  Laws,  which,  after  many  public  hearings 
and  a  very  careful  investigation  of  the  subject,  reported  to  the 
legislature  in  January,  1903,  the  draft  of  a  Business  Corporation 
Law  which  was  subsequently  enacted  without  substantial  amend- 
ment, with  the  exception  of  one  provision  relating  to  taxation. 

It  was  the  avowed  purpose  of  the  special  committee,  upon 
which  much  of  the  responsibility  for  this  new  law  must  rest,  to 
draft  a  law  which  would  permit,  under  conditions  generally  as 
favorable  as  could  be  secured  under  a  foreign  charter,  the  in- 
corporation under  Massachusetts  laws  of  business  enterprises 
financed  by  Massachusetts  capital.  The  new  law  certainly  was 
not  designed  to  increase  the  revenues  of  the  state.  LTnder  the 
old  law  Massachusetts  collected  from  both  business  and  public 
service  corporations  a  larger  franchise  tax  for  the  year  1901  than 
was  collected  in  that  year  from  the  same  source  by  any  other 
state  except  New  York  and  New  Jersey.1  It  can  be  stated  with 

1  The  amounts  received  in  loot  from  the  taxation  of  corporate  franchises  of  busi- 
ness and  public  service  corporations,  as  reported  by  the  Massachusetts  Committee  on 
Corporation  Laws,  Report,  pp.  299—303,  are  the  following: 

New  York $4,966,080.93 

New  Jersey 1.633,074.19 

Massachusetts* 1,271,310.23 

Penns\lvania 1,005,184.23 

West  Virginia 322,078,50 

Maine 30,225.00 

*  The  receipts  from  business  corporations  reported  by  the  Committee  on  Corpora- 
tion Laws  were  5331,134.38.  The  balance  represents  receipts  fn>m  public  -.ervice 
and  other  corporations  reported  by  the  Tax  Commissioner.  Report,  1901.  p.  8. 


384  TRUSTS,    POOLS   AND    CORPORATIONS 

equal  positiveness  that  it  was  not  the  intention  of  the  framers 
of  the  new  law  to  place  Massachusetts  in  the  position  of  being 
a  competitive  rival  for  the  business  of  incorporating  enterprises 
financed  and  doing  business  exclusively  outside  of  the  state,  or 
of  drafting  a  law  "  which  will  be  favorable  to  the  organization  of 
large  corporations  popularly  known  as  trusts."  1  How  far  Mas- 
sachusetts has  succeeded  in  adopting  a  corporation  code  which, 
on  the  one  hand,  will  attract  the  incorporation  of  the  legitimate 
business  enterprises  in  which  its  citizens  are  interested,  whether 
designed  to  do  business  within  or  without  the  state,  and  yet  will 
discourage  the  organization  of  inflated  promotion  schemes  and 
adequately  protect  both  the  stockholder  and  creditor,  can  best 
be  determined  after  considering  in  some  detail  those  provisions 
of  the  new  law  which  are  particularly  designed  to  accomplish 
these  ends. 

Although  the  subject  of  the  taxation  of  corporations  occupied 
by  far  the  largest  share  of  the  consideration  of  the  special  com- 
mittee, the  recommended  changes  in  the  existing  law  are  few 
in  number.  The  existing  theory,  of  a  tax  levied  by  the  state 
indirectly  upon  the  stockholder  on  the  market  value  of  his  stock, 
has  been  retained,  not  because  the  theory  upon  principle  com- 
mended itself  especially  to  the  committee,  but  for  the  practical 
reason  that  any  other  rule  which  could  logically  be  adopted 
would  very  largely  increase  the  amount  of  taxes  paid  by  more 
than  half  of  the  existing  Massachusetts  corporations.  The  com- 
mittee so  amended  the  former  laws  relating  to  taxation  as  to 
enable  the  organization  of  Massachusetts  corporations  for  the 
purpose  of  doing  business  outside  of  the  state  without  being 
subject  to  undue  taxation,  and  also  to  make  possible  the  organi- 
zation of  corporations  to  hold  the  securities  of  Massachusetts 
companies.  The  legislature  added  a  limitation  of  the  maximum 
value  of  the  taxable  corporate  franchise  to  an  amount  not  exceed- 
ing 1 20  per  cent  of  the  actual  value  of  the  tangible  assets  of  the 
corporation.  While  this  amendment  will  reduce  somewhat  in 
the  first  instance  the  revenue  of  the  state  from  its  corporations, 
it  was  believed  to  be  necessary  in  order  to  retain  in  the  state 
some  of  the  most  successful  corporations,  and  to  attract  business 

1  Report  uf  (. \mniiiltee  on  Corporation  Laws,  pp.  24  and  61, 


MASSACHUSETTS    BUSINESS   CORPORATION    LAW      385 

enterprises  which  otherwise  might  hesitate  to  incorporate  under 
a  Massachusetts  charter  for  fear  of  the  operation  of  an  unlimited 
tax  upon  that  portion  of  the  value  of  their  capital  stock  repre- 
senting intangible  assets.  The  provisions  of  the  new  law  relat- 
ing to  taxation  are,  therefore,  a  reenactment  of  the  former  laws, 
with  amendments  which  will  prevent  double  taxation  and  place 
Massachusetts  as  nearly  as  possible  on  a  basis  of  equality  with 
other  states  in  this  particular. 

Corporations  organized  under  the  Business  Corporation  Law 
are  permitted  the  largest  degree  of  freedom  in  conducting  their 
business  consistent  with  a  sufficient  protection  of  the  interests 
of  minority  stockholders.  All  corporate  action  can  be  taken 
upon  the  affirmative  vote  of  a  majority  in  interest  of  the  stock- 
holders, except  such  action  as  may  affect  the  value  of  the  stock. 
It  should  be  noted,  however,  that  the  creation  of  a  new  class 
of  stock,  or  the  sale,  lease  or  exchange  of  all  of  the  property 
of  the  corporation,  requires  the  concurrent  vote  of  two-thirds  of 
its  stockholders.  At  organization  almost  any  scheme  regulating 
the  classification,  powers  and  voting  rights  of  the  stock  of  the 
company  may  be  lawfully  adopted.  The  stockholders'  and 
directors'  liabilities  are  reduced  to  correspond  in  the  main  with 
those  prevailing  in  most  of  the  other  states.  The  requirements 
of  the  former  law  relating  to  the  annual  filing  of  certificates 
of  condition  by  domestic  and  foreign  corporations  have  been 
retained.  The  machinery  by  which  stockholders  may  secure 
information  as  to  the  doings  of  the  corporation  has  been  made 
more  effective.  It  was  the  purpose  of  the  committee  to  draft  a 
law  in  this  particular  which  would  enable  any  stockholder  who, 
in  good  faith,  desired  information,  to  secure  it  without  delay  or 
unnecessary  expense,  while,  on  the  other  hand,  the  law  would 
protect  the  corporation  from  inquisitive  annoyance,  instigated 
perhaps  bv  hostile  motives. 

In  relation  to  foreign  corporations,  Massachusetts  has  followed 
the  lead  of  several  of  the  Western  states  in  attempting  to  place 
upon  an  equal  basis,  so  far  as  possible,  the  corporations  organ- 
ized under  its  own  laws  and  those  organized  under  foreign 
charters.  Rather  as  a  means  of  demanding  recognition  than  for 
the  purpose  ot  securing  a  l:\rger  amount  ot  revenue,  an  excise 


386  TRUSTS,   POOLS  AND   CORPORATIONS 

tax  has  been  imposed  upon  foreign  corporations.  As  this  tax 
amounts  to  only  one-hundredth  of  one  per  cent  upon  the 
authorized  capitalization,  and  as  corporations  are  permitted  to 
deduct  from  this  amount  whatever  taxes  are  locally  paid  by 
them,  the  tax  will  practically  affect  those  corporations  only 
which  under  the  old  law  conducted  their  business  in  whole  or 
in  part  in  the  state  without  directly  paying  any  tax  whatever  in 
return  for  the  privilege  which  the  state  as  a  matter  of  comity 
extended  to  them.  As  the  maximum  tax  to  be  paid  is  limited 
to  two  thousand  dollars,  it  is  not  expected  that  even  the  larger 
industrial  corporations  will  be  deterred  from  doing  business  in 
the  state.  It  is  believed  that  with  the  imposition  of  this  nomi- 
nal excise  tax  will  come  an  increased  degree  of  responsibility 
from  the  state  towards  foreign  corporations ;  and,  inasmuch  as 
no  action  can  be  maintained  in  its  courts  by  foreign  corporations 
until  this  tax  is  paid  and  the  annual  certificate  of  condition  filed, 
it  is  hoped  that  the  new  law  will  inspire  a  greater  respect  for 
the  legislative  requirements  of  the  state  than  has  been  evinced 
during  the  past  few  years  by  such  corporations. 

From  an  economic  point  of  view  these  features  of  the 
Business  Corporation  Law  are  overshadowed  in  interest  by 
its  provisions  relating  to  the  issue  and  payment  of  capital  stock. 
The  attacks  which  have  been  made  upon  the  new  law  have  been 
focussed  upon  the  fact  that  it  permits  the  unlimited  capitaliza- 
tion of  intangible  assets,  —  "wind  and  water"  is  the  more  pop- 
ular expression  among  the  critics  of  the  law.  It  may,  then,  be 
profitable  to  consider  this  provision  of  the  new  law  in  some 
detail. 

Logically  there  are  the  three  following  theories  upon  which 
statutory  provisions  relating  to  the  payment  of  capital  stock  by 
property  conveyed  to  the  corporation  can  be  based  : 

i.  That  the  incorporators  are  the  judges  of  the  value  of 
property  to  be  conveyed  to  the  corporation  in  payment  of  stock, 
and  that  the  state  has  no  interest  or  duty  in  the  matter  except 
to  create  a  liability  for  fraudulent  action.  This  is  the  most 
generally  accepted  theory  of  the  more  recently  enacted  corpora- 
tion laws  in  this  country. 

On  this  theory,  in  the  absence  of  actual  fraud,  the  judgment 


MASSACHUSETTS   BUSINESS   CORPORATION    LAW      387 

of  the  directors  is  conclusive.  Even  if  fraud  can  be  proved, 
which  has  only  rarely  been  accomplished,  the  title  to  the  stock 
in  question  cannot  be  attacked  ;  and  the  only  remedy  is  a  per- 
sonal one  against  the  fraudulent  directors.  The  practice,  so 
widely  advertised  in  connection  with  the  receivership  proceed- 
ings of  the  United  States  Shipbuilding  Company,  of  electing 
irresponsible  dummies  to  protect  the  parties  to  fraudulent  pro- 
ceedings from  any  danger  of  personal  liability,  is  by  no  means 
unusual.  The  most  obvious  defect  in  this  legislation  is  that  the 
facts  concerning  the  issue  of  stock  for  property  are  hidden  in 
the  records  of  proceedings  of  the  board  of  directors  to  which 
the  stockholder  or  prospective  investor  has  no  access.  He  is 
unable  to  form  an  independent  judgment  as  to  the  value  of  the 
property  of  which  his  stock  represents  a  fractional  interest.  He 
is  guided  in  making  his  investment  solely  by  the  more  or  less 
misleading  statements  contained  in  a  prospectus  and  by  the 
equally  fictitious  quotations  which  manipulation  in  the  stock 
market  can  give  to  such  securities  when  issued  and  listed  on  a 
stock  exchange. 

2.  The  second  theory  relating  to  the  payment  of  capital  stock 
in  property  is  that  the  issue  of  stock  so  paid  for  must  be  con- 
trolled and  limited  by  the  state.  This  theory  has  been  logically 
adopted  in  the  existing  legislation  in  Massachusetts,  so  generally 
and  justly  commended,  relating  to  the  issue  of  securities  by 
public  service  corporations.  It  has  been  asserted  that  it  gov- 
erned also  the  issue  of  stock  of  business  corporations  under  the 
law  now  repealed  by  the  Business  Corporation  Law.  But  this 
assertion  would  not  be  made  by  any  one  familiar  with  its  admin- 
istration. 

The  earlier  law  provided  that  capital  stock  might  be  issued 
for  propertv  to  the  extent  sanctioned  bv  the  Commissioner  of 
Corporations.  The  commissioner  soon  found  it  necessarv  to 
establish  certain  rules  in  regard  to  this  subject.  One  was  that 
no  stock  could  be  issued  for  patent  rights  or  other  intangible 
interests.  This  rule  was  conservative,  and  worked  substantial 
justice  in  a  majority  of  cases.  In  some  instances,  however, 
patent  rights  have  proved  to  be  very  substantial  assets  from  the 
point  of  view  of  the  investments  which  they  represent  and  the 


388  TRUSTS,   POOLS  AND   CORPORATIONS 

dividends  which  they  can  earn.  In  at  least  one  case  a  well- 
established  business  in  Massachusetts  was  compelled  to  secure 
a  special  act  of  incorporation  from  the  legislature  in  order  to 
make  possible  a  partial  capitalization  of  its  very  valuable  good  will. 

As  the  statute  provided  no  machinery,  and  as  no  appropria- 
tion was  allowed,  for  securing  a  fair  appraisal  of  the  tangible 
property  to  be  conveyed  to  the  corporation  in  payment  of  its 
stock,  the  Commissioner  of  Corporations  has  always  required  a 
sworn  statement  to  be  made  as  to  the  value  of  property  for 
which  it  is  proposed  to  issue  stock.  This  statement  has  been 
accepted  by  the  commissioner,  in  the  absence  of  further  infor- 
mation, as  a  basis  of  his  appraisal.  The  practical  effect  of  this 
practice  has  been  to  enable  incorporators  to  fix  their  own  valua- 
tion of  property  for  which  stock  is  issued,  as  is  the  almost  uni- 
versal rule  in  other  states.  That  the  former  law  was  unsuccessful 
in  guaranteeing  the  success  of  corporations  organized  under  its 
provisions  is  well  indicated  by  the  fact,  as  the  writer  has  been 
informed,  that  nearly  75  per  cent  of  the  corporations  which 
have  been  reported  insolvent  to  the  United  States  courts  for 
the  district  of  Massachusetts  during  the  past  three  years  have 
been  organized  under  laws  of  that  state.  It  may  fairly  be  said, 
therefore,  that  under  the  former  law  the  state  in  attempting  to 
be  sponsor  for  the  solvency  of  private  corporations  organized 
under  its  provisions  failed  signally  to  accomplish  the  intended 
results.  There  can  be  no  middle  way.  The  state  must  either 
undertake  an  examination  by  its  own  experts  of  the  value  of  the 
prospective  assets  of  the  corporation  or  it  must  not  pretend  to 
do  anything  of  the  kind. 

There  is  much  to  be  said  in  favor  of  such  an  appraisal  in  the 
case  of  public  service  corporations.  The  state  has  granted 
valuable  franchises,  and  in  many  cases  protects  the  corporation 
from  disastrous  competition.  It  may  well  be  argued  that  in  re- 
turn it  is  the  duty  of  the  state  to  see  to  it  that  these  franchises 
are  not  sold  to  the  investing  public  at  an  unfair  valuation. 
There  is  no  such  reason  for  protecting  the  investors  in  business 
corporations  where  competition  is  unlimited  and  the  onlv  right 
given  by  the  state  is  the  right  of  existence.  In  this  class  of 
corporations  the  state  cannot  afford  to  undertake  for  the  benefit 


MASSACHUSETTS   BUSINESS   CORPORATION    LAW     389 

of  prospective  investors  —  many  of  whom,  perhaps,  are  not  its 
citizens  —  an  appraisal  for  which  it  will  be  held  responsible.  If 
all  the  facts  necessary  to  enable  individual  investors  to  exercise 
their  own  judgment  as  to  the  value  of  the  securities  of  private 
corporations  are  required  and  enforced  by  suitable  legislation, 
the  state  has  done  all  that  can  be  required  of  it. 

3.  The  third  theory,  and  the  one  adopted  in  the  new  Massa- 
chusetts law  in  regard  to  the  duties  of  the  state  in  regulating  the 
issue  of  stock  for  property,  is  that,  so  long  as  incorporators  are 
not  acting  fraudulently,  they  may  capitalize  any  property,  tan- 
gible or  intangible,  at  any  amount  they  desire,  provided  that  no 
stock  may  be  issued  at  or  after  organization  until  a  statement 
has  been  prepared  and  placed  upon  public  record,  showing  the 
amount  of  stock  which  has  been  issued  and  the  exact  manner  in 
which  it  is  paid  for.  If  the  payment  is  in  cash,  the  facts  will 
be  so  stated  ;  if  in  property,  a  description  of  the  same  must  be 
included  in  the  statement,  which  will  be  sufficient  for  purposes 
of  identification  ;  if  stock  is  to  be  issued  for  services  or  expenses, 
their  nature  or  extent  must  be  set  forth.  On  this  theory  pro- 
spective stockholders  and  creditors  deal  with  the  corporation  at 
their  own  peril.  The  state  does  not  assume  either  to  give  its 
sanction  to  a  "  blind  pool,"  as  it  may  be  said  to  do  under  the  first 
theory  mentioned,  or  to  guarantee,  directly  or  indirectly,  the 
value  of  the  property  for  which  capital  stock  is  issued,  as  it  may 
be  said  to  have  clone  under  the  former  law. 

Publicity,1  therefore,  and  not  paternalism,  is  now  adopted  in 
Massachusetts  as  its  remedy  for  the  evil  of  overcapitalization. 
A  public  statement  sufficient  to  acquaint  prospective  stockholders 
with  the  facts  concerning  the  property  of  which  they  may  become 
part  owners  is,  under  the  new  law,  a  condition  precedent  to  the 
legality  of  stock  issued.  Directors  are  liable,  as  in  other  states 
and  as  they  were  liable  under  the  former  law  in  Massachusetts, 
for  making  statements  which  they  know  to  be  false.  This  pro- 
tection, however,  is  merely  secondarv.  If  investors  and  spec- 
ulators purchase,  or  make  advance  payments  on  a  speculative 


in  dcscrilicd.  —  Kl> 


390  TRUSTS,   POOLS  AND   CORPORATIONS 

purchase  by  a  broker,  of  a  fractional  interest  in  property  which 
is  described  to  them  with  sufficient  detail  for  purposes  of  identi- 
fication, they  have  themselves  to  blame  if  they  pay  too  high  a 
price  for  it.  And  when  the  investor  has  thoroughly  learned  his 
lesson,  which  can  only  be  taught  by  experience,  he  will  be  able, 
with  the  assistance  of  legislation  based  upon  the  theory  now 
adopted  by  Massachusetts,  to  make  a  search  of  the  facts  relating 
to  the  value  of  stock  in  which  he  is  interested,  with  much  of  the 
same  thoroughness  which  he  now  shows  in  examining  the  title 
to  real  estate. 

At  least  for  the  present,  the  affirmative  requirements  of  the 
new  law  relating  to  publicity,  both  in  regard  to  the  payment  of 
capital  and  in  the  matter  of  annual  statements  of  financial  con- 
dition, will  probably  deter  the  incorporation  in  Massachusetts 
of  the  larger  industrial  organizations.  The  practical  prohibition 
against  the  organization  of  corporations  to  hold  securities  other 
than  those  of  Massachusetts  companies,  while  not  primarily 
designed  for  this  purpose,  is  another  very  practical  reason  why 
the  very  large  industrial  corporations  will  continue  to  organize 
outside  of  that  state.  Finally,  the  requirement  of  the  minimum 
state  corporate  tax  of  one-tenth  of  one  per  cent  of  authorized 
capital,  without  allowing,  as  is  the  practice  in  many  of  the  so- 
called  "corporation  states,"  very  large  deductions  for  enter- 
prises of  large  capitalization,  in  itself  is  sufficient  to  discourage 
the  organization  of  such  corporations.  It  was  estimated  by  the 
special  committee1  that  the  United  States  Steel  Corporation 
would,  under  this  provision  of  the  Massachusetts  law,  pay  an 
annual  tax  of  over  six  hundred  thousand  dollars  as  compared 
with  its  present  annual  tax  in  Xew  Jersey  of  less  than  sixty 
thousand  dollars. 

The  effect  of  the  new  law  in  attracting  the  incorporation  of  new 
companies  and  upon  the  revenues  of  the  state  cannot  be  defi- 
nitely determined  until  it  has  been  in  effect  for  at  least  a  year. 
The  results  already  shown  are  gratifying  to  its  friends.  The 
following  table  indicates  the  number  and  the  total  capitalization 
of  corporations  organized  under  the  Business  Corporation  Law 
from  August  I  to  November  I,  1903,  with  the  amount  received 

1  Report  of  Committee  on  Corporation  Laws,  p.  63. 


MASSACHUSETTS  BUSINESS   CORPORATION    LAW     391 


by  the  state  for  organization  fees.1      The  figures  for  the  corre- 
sponding period  in  1902  are  also  given  as  a  basis  of  comparison : 


YEAR 

NUMBER  OF 
CORPORATIONS 

ToTA  L 

CAPITALIZATION 

FEES 

IQO2     . 

44. 

51,015,800 

S;;o  oo 

I  <)O  }     . 

2OO 

$12,481,100 

53,  Us  }  7-1 

Of  the  newly  organized  corporations,  one  is  capitalized  for 
$1,500,000,  one  for  $800,000,  four  with  a  capital  of  $500,000, 
six  with  a  capital  of  $250,000,  and  the  remaining  ranging  down 
to  the  minimum  of  $1000.  In  November  an  industrial  corpora- 
tion was  incorporated  with  a  capitalization  of  $5,900,000  to  take 
over,  under  a  plan  of  reorganization,  the  assets  of  a  large  indus- 
trial business  operating  chiefly  in  Massachusetts,  formerly  incor- 
porated with  a  larger  capitalization  under  the  laws  of  New 
Jersey. 

These  figures  show  that  the  new  law  has  already  become 
acceptable  to  the  organizers  of  the  smaller  partnership  corpo- 
rations. That  more  corporations  with  a  larger  capitalization 
have  not  already  been  organized  is  not  surprising  in  view  of 
prevailing  financial  conditions  and  the  probable  unfamiliarity  of 
the  business  interests  of  the  state  with  all  of  the  advantages 
of  the  new  law. 

It  will  probably  never  be  possible  to  enact  a  corporation  law 
which  will  entirely  solve  the  problem  of  giving  sufficient  freedom 
to  the  promoters  of  the  enterprise,  adequate  protection  to  its 

1  Later  data  are  confirmatory  as  follows.  —  En. 


Xew  I, aw. 

August  I.  1903,  to  August  i. 


?  1 1.590.460 
566.023.610 


392  TRUSTS,   POOLS  AND   CORPORATIONS 

stockholders,  and  an  equitable  tax  to  the  state  which  is  respon- 
sible for  its  creation.  It  certainly  will  not  be  possible  to  frame 
such  a  code  in  this  country  until  a  national  law  can  constitution- 
ally be  enacted.  In  emphasizing  the  necessity  of  publicity  in 
relation  to  the  question  of  capitalization,  and  the  opportunities 
of  regulation  by  taxation,  in  the  case  of  foreign  corporations, 
Massachusetts  has,  by  the  enactment  of  its  Business  Corporation 
Law,  at  least  pointed  the  way  which  must  be  followed  in  future 
legislation. 

GROSVENOR  CALKINS. 


XVI 

THE  PROMOTION  OF  COMPANIES  AND  THE 
VALUATION  OF  ASSETS  ACCORDING  TO  GER- 
MAN LAW1 

GERMAN  Company  Law  was  entirely  changed  and  recast 
by  a  statute  passed  in  1884,  which  introduced  a  number  of 
checks  and  restrictions  of  an  entirely  novel  character.  Many 
fears  were  expressed  at  the  time.  All  enterprise  was  to  be  ham- 
pered in  the  future  and  driven  to  foreign  countries.  No  persons 
of  means  and  standing  were  to  be  found  who  would  incur  the 
liabilities  and  risks  to  which  directors  and  promoters  were  to  be 
subject  under  the  new  state  of  things.  Sufficient  time  has  now 
elapsed  to  show  that  the  forecast  of  these  prophets  of  evil  was 
based  on  misapprehension.  The  statistics  prove  conclusively  that 
the  formation  of  new  companies,  far  from  being  arrested  by  the 
greater  stringency  of  the  law,  has  been  progressing  in  a  most 
remarkable  manner,  and  that  the  career  of  German  companies 
has,  on  the  whole,  been  most  prosperous.2  Some  of  the  new 

1  I'Vom  the  Economic  Journal,  Yol  X,  1900,  pp.  1-19.  See  Ring,  Aktiengesetz, 
2d  ed.,  Devlin,  1892;  Pinnev,  Das  Deutsche  Aktienrecht,  Derlin,  1899;  Esser,  Die 
Aktiengesell.schaft,  Derlin,  1899  ;  Riesser,  Die  Xeuevungcn  im  Deutschen  Aktienvecht. 
Devlin,  1899. 

-  There  were  in  Cievmanv  in  180,6  according  to  Professor  R.  van  der  Borght's  esti- 
mate (Conrad's  Handworterbuch,  Yol.  I,  2d  ed.,  pp.  192-194)  3712  companies 
limited  by  shares  with  a  total  paid-up  capital  of  over  ,£340,000,000,  and  \\ith  reserve 
funds  amounting  all  together  to  £58.000.000;  th-  annual  net  earnings  of  3249  com- 
panies amounted  to  about  ,£32.400,000.  or  about  10  per  cent  of  the  ]  aid-up  capital. 
It  is  safe  to  as>ume  from  the  ligures  given  that  not  less  than  one-half  of  the  total 
number  of  these  companies  were  formed  after  the  Act  of  1884.  In  the  blue  book 
published  by  the  departmental  committee  of  the  \'»  avd  of  Trade  in  1895  (7779)  a 
letter  is  quoted  from  Mr.  C.erb  of  the  D;iti-h  Consulate  Ceiieral  at  Derlin  estimating 
the  total  pai  1-up  capital  at  f.  2  00,0  00,000  (.see  p.  29\  I  showed  at  the  time  'see  p.  30,1 
that  the  capital  must  be  at  least  .£300,000,000,  and  the  statistics  given  in  the  text 
prove  conclusively  that  Mr.  Herb's  e.-timate  was  still  further  from  the  truth  than  I 
suspected. 

393 


394  TRUSTS,   POOLS  AND   CORPORATIONS 

safeguards  have  not  proved  quite  as  efficient  as  was  expected  by 
the  legislature,  but  the  net  result  has  been  a  clear  gain.  There 
are  good  grounds  for  saying  that  dishonest  or  even  reckless 
company  promotion  is  no  longer  known  in  Germany.  No  doubt 
commercial  and  industrious  enterprise  in  that  country  has  lately 
passed  through  a  period  of  prosperity,  which  cannot  be  expected 
to  continue  unchecked  ;  but  times  of  prosperity,  as  a  general  rule, 
facilitate  the  task  of  unscrupulous  financiers,  and  the  absence  of 
unsound  company  promotion  in  such  times  may  be  accepted  as 
satisfactory  proof  of  the  efficiency  of  the  law. 

The  statute  on  stock-exchange  and  produce-exchange  trans- 
actions passed  by  the  German  Reichstag  in  1896,  though  laying 
down  certain  restrictions  as  to  dealings  in  shares  on  the  stock 
exchanges,  does  not  touch  the  law  on  the  formation  and  manage- 
ment of  companies.  The  imperial  commission  on  whose  recom- 
mendation that  statute  was  prepared  1  accepted  the  testimony  of 
experts  on  all  sorts  of  matters,  however  remotely  connected  with 
the  subject  of  their  inquiry,  and  would  no  doubt  have  listened 
to  any  complaints  that  might  have  been  made  as  to  the  efficiency 
of  the  law  of  1884.  The  fact  that  no  such  criticism  came  forward 
is  good  negative  evidence  of  the  non-existence  of  any  substantial 
grounds  of  dissatisfaction. 

Another  opportunity  for  complaints  against  the  efficiency  of 
the  Act  of  1884  was  given  by  the  inquiries  of  the  committee 
appointed  to  assist  in  the  revision  of  the  German  mercantile 
code,  but  in  this  case  also  the  only  points  referred  to  were 
matters  of  detail  not  affecting  the  main  principles  of  the  law. 
The  amendments  which  were  introduced  into  the  new  mercantile 
code  in  connection  with  company  law  are  not  without  importance, 
but  they  are  all  in  the  direction  of  strengthening  the  principles 
laid  clown  in  1884. 

Company  law  can  be  looked  upon  from  three  different  points 
of  view  :  the  shareholders'  point  of  view,  the  creditors'  point  of 
view,  and  the  point  of  view  of  the  general  public.  If  the  share- 
holders' point  of  view  was  the  only  one  to  be  considered,  much 
might  be  said  in  favor  of  abstention  from  legislative  inter- 

1  The  reports  and  minutes  of  the  sittings  of  this  commission  have  been  published 
and  contain  much  interesting:  information. 


GERMAN    COMPANY   LAW  395 

ference.  There  is  no  reason  why  persons  who  invest  or  speculate 
in  the  shares  of  companies  incorporated  in  their  own  countries 
should  enjoy  better  protection  than  those  who  invest  or  speculate 
in  the  shares  of  foreign  companies,  or  in  other  stock-exchange 
securities.  Hut  the  two  other  points  of  view  are  of  much  greater 
importance ;  all  trading  with  unlimited  liability  offers  certain 
safeguards  to  the  creditors  and  to  the  general  public,  which  are 
withdrawn  in  the  case  of  trading  with  limited  liability,  and  ought 
in  that  case  to  be  replaced  by  corresponding  safeguards  of 
another  kind.  I  mention  the  general  public  as  distinguished 
from  the  creditors,  because  the  dangers  to  which  the  general 
public  is  exposed  by  limited-liability  trading  are  of  a  kind  dif- 
fering entirely  from  the  risks  incurred  by  creditors.  Bad  com- 
pany law,  as  will  be  explained  in  the  further  course  of  this  article, 
is  a  direct  inducement  to  the  parties  concerned  to  trade  in  an 
unsound  manner,  and  the  effects  of  unsound  trade,  like  those  of 
bad  sanitation,  go  very  far  beyond  the  area  from  which  it  pro- 
ceeds. There  is  one  principle  which  should  never  be  disre- 
garded, whenever  the  privilege  of  limited  liability  is  conferred 
by  law  ;  the  liability  of  a  fund  having  a  fixed  and  ascertainable 
value  should  be  substituted  for  the  unlimited  liability  of  indi- 
viduals. The  value  of  this  fund  should  on  the  formation  of  the 
company  correspond  with  the  amount  of  its  nominal  capital,  and 
precautions  should  be  taken  to  prevent,  as  much  as  possible,  the 
diminution  of  this  fund  during  the  subsequent  stages  of  the 
company's  existence.  Company  law  should,  therefore,  find 
means  to  assure  (^)that  the  value  of  the  property  which  repre- 
sents the  capital  of  a  company  on  its  formation  shall  correspond 
with  the  amount  of  the  nominal  paid-up  capital  of  the  company; 
(/>)  that  property  of  the  same  value  should  continue  to  represent 
the  paid-up  capital  of  the  company  as  long  as  it  is  not  increased, 
and  that  on  any  increase  of  the  paid-up  capital  the  property 
representing  the  increase  should  be  of  a  value  at  least  equal  to 
the  nominal  amount  of  the  increase.  I  shall  deal  with  each  set 
of  rules  separately. 


396  TRUSTS,   POOLS  AND   CORPORATIONS 

A.  —  PROVISIONS  AS  TO  VALUATION  OF  ASSETS  ON  FORMATION 

OF  COMPANY 

The  amount  of  the  nominal  capital  with  which  a  company  is 
started  in  England  is  purely  arbitrary,  and  need  not  stand  in 
any  relation  to  the  value  of  the  assets  by  which  it  is  repre- 
sented. A  trader  who  converts  his  business  into  a  company 
and  keeps  the  shares  himself  has  every  inducement  to  fix  the 
capital  at  a  high  figure,  and  as  he  is  buyer  and  seller  in  one  per- 
son, the  price  at  which  the  business  is  sold  —  apart  from  the 
question  of  stamp  duties  —  is  absolutely  immaterial. 

If  the  shares  are  to  be  taken  by  the  public  the  character 
which  Company  Promotion  is  apt  to  assume  is  shown  by  the 
following  illustration.  A  trader  wants  to  sell  his  business, 
which  is  worth  ,£10,000,  and  approaches  a  financial  agent  con- 
versant with  such  matters.  The  agent  enters  into  a  conditional 
contract  whereby  he  agrees  to  buy  the  business  in  the  event 
of  his  being  able  to  form  a  company  with  a  paid-up  capital  of 
.£50,000.  The  price  promised  uader  the  circumstances  would 
probably  be  ;£  10,000  in  cash  and  the  same  amount  in  shares. 
The  agent  then  tries  to  find  some  financiers  willing  to  form  a 
syndicate  for  the  purpose ;  if  these  are  found  they  are  substi- 
tuted as  purchasers  for  the  financial  agent,  who  would  prob- 
ably be  satisfied  with  ^£5000  for  his  profit  on  the  transaction. 
These  .£5000  would  probably  be  divided  by  him  with  some 
friends  who  helped  to  collect  the  members  of  the  syndicate. 
The  syndicate  would  subsequently  sell  the  business  to  the 
newly  formed  company  for  the  ,£50,000,  and  if  they  succeed 
in  placing  the  whole  of  the  shares  they  will,  under  the  above- 
mentioned  circumstances,  obtain  a  gross  profit  of  ;£2  5,000,  but 
out  of  this  sum  some  other  intermediaries  must  be  paid,  legal 
expenses  and  stamp  duties  must  be  disbursed,  and,  to  judge 
from  recent  revelations,  the  financial  press  must  receive  en- 
couragement. The  final  result  of  all  this  is  that  the  company 
acquires  the  property  at  a  price  representing  five  times  its  real 
value,  the  difference  being  divided  by  a  number  of  people  who 
have  all  in  their  way  helped  to  float  the  company.  It  is  well 


GERMAN    COMPANY    LAW  397 

known  that  this  rate  of  profit  is  by  no  means  exceptional  and  is 
frequently  exceeded. 

Another  circumstance  has  also  to  be  taken  into  consideration 
in  places  in  which  British  Company  Law  is  applied. 

Assuming  in  the  case  just  mentioned,  that  the  public  do  not 
take  all  the  shares,  the  syndicate  may  consider  it  worth  while  to 
go  to  allotment  on  the  amount  subscribed,  and  to  trust  to  chance 
as  to  placing  the  rest  of  the  shares  at  a  subsequent  period.  In 
the  instance  given  above  this  would  have  no  effect  on  the  work- 
ing of  the  company,  as  the  company  would  not  get  any  of  the 
proceeds  of  the  shares  in  any  event,  but  in  some  cases  the  pur- 
chase price  does  not  absorb  the  whole  of  the  nominal  capital, 
some  portion  of  the  latter  being  reserved  as  a  working  capital ; 
in  such  a  case  the  company  has  of  course  to  suffer  by  the  non- 
success  of  the  issue. 

Thus  it  will  be  seen  that  the  principle  of  establishing  a  defi- 
nite fund  available  for  the  payment  of  the  company's  debts,  the 
value  of  which  can  easily  be  ascertained,  is  in  this  country  de- 
parted from  in  two  ways:  (i)  by  the  absence  of  provisions  in- 
suring that  the  property  in  which  the  capital  is  invested  in  the 
first  instance  is  taken  over  at  a  price  representing  its  true  value  ; 
(2)  by  the  absence  of  provisions  preventing  a  company  from 
starting  business  before  the  whole  of  its  capital  has  been  sub- 
scribed. As  regards  the  second  point,  the  bill  which  is  now 
before  Parliament  provides  a  partial  remedy  by  requiring  a 
statement  as  to  the  minimum  amount  of  subscriptions  on  which 
the  company  will  proceed  to  allotment,  but  this  mode  of  deal- 
ing with  the  matter,  though  affording  a  certain  amount  of  pro- 
tection to  subscribers  for  shares,  does  not  in  any  way  benefit 
the  interests  of  the  creditors  or  of  the  general  public. 

In  Germany  the  genuine  nature  of  the  valuation  put  on  the 
original  assets  is  secured  by  elaborate  provisions  which  I  shall 
deal  with  at  length,  and  the  starting  of  business  with  an  insuffi- 
ciently subscribed  capital  is  prevented  by  the  rules  laid  clown  in 
sections  195  and  200  of  the  new  mercantile  code,  according  to 
which  the  corporate  existence  of  a  company  cannot  possibly 
begin  before  its  whole  capital  has  been  subscribed  for,  and  before 
at  least  25  per  cent  of  the  amount  payable  in  cash  is  in  the 


398  TRUSTS,   POOLS  AND   CORPORATIONS 

actual  possession  of  the  managers.  There  are  two  modes  of 
formation  permissible  in  Germany  :  (i)  the  simultaneous  method, 
according  to  which  the  promoters  take  up  the  whole  capital  and 
offer  it  to  the  public  after  the  formation  of  the  company  ;  (2)  the 
successive  method,  which  enables  the  promoters  to  offer  the 
shares  before  the  registration  of  the  company  ;  but  in  either  case 
the  subscription  of  the  whole  capital  must  be  complete  before 
the  company  can  begin  business. 

These  requirements  as  to  the  subscription  of  the  capital 
would  not  be  of  much  importance,  if  the  first  point  to  which  I 
have  called  attention,  namely,  the  adequacy  of  the  value  of  the 
property  in  which  the  capital  is  invested,  had  not  been  properly 
attended  to.  This  was  done  by  provisions  requiring  the -following 
things  :  (a)  that  certain  matters  relating  to  the  history  of  the 
formation  of  the  company  should  be  inserted  into  the  articles  of 
the  company  ;  (b)  that  the  promoters  should  make  a  report  on 
the  promotion  transactions,  for  the  accuracy  and  completeness 
of  which  they  are  civilly  and  criminally  liable  ;  (r)  by  provisions 
requiring  the  members  of  both  boards  of  the  company  to  examine 
into  the  circumstances  of  the  formation  of  the  company  ;  (d)  by 
provisions  requiring  an  examination  by  independent  auditors  in 
certain  cases. 

(a)  The  articles  have  to  state  (among  other  things): 

(1)  The  nature  of  any  consideration  not  being  cash  against 
which  any  shares  are  issued. 

(2)  The  names  of  any  persons  from  whom   the  company  on 
its  formation  is  to  acquire  any  property,  and  the  prices  at  which 
any  such  property  is  to  be  acquired. 

(3)  The  total  amount  of  any  payments  to  be  made  by  the  com- 
pany for  services  rendered  in  connection  with  the  promotion  of 
the  company. 

(b)  In  all  cases  in  which  any  shares  are  issued  for  any  con- 
sideration not    being  cash,   or  in   which  any  property  is  to  be 
acquired  on  the  formation  of  the  company,  the  promoters  have 
to  prepare  and  sign  a  written  report,  in  which   they  have  to   set 
out  the  circumstances  from  which  it  appears  that  the  property  to 
be  taken  over  in  lieu  of  cash  or  to  be  acquired  by  the  company 
is  worth  the  amount  for  which  it  is  to  be  taken.      In  this  report 


GERMAN    COMPANY   LAW  399 

all  transactions  which  led  up  to  the  ultimate  sale  of  the  property 
in  question  to  the  company  must  be  mentioned,  together  with  all 
prices  paid  within  the  preceding  two  years  for  the  purchase  or 
construction  of  any  part  of  such  property  ;  in  the  case  of  a 
company  taking  over  a  whole  undertaking  the  results  of  the 
trading  of  the  two  preceding  years  must  also  be  set  forth.  The 
term  "promoter,"  according  toe.  187, includes  all  signatories  of  the 
articles  of  association,  and  also  all  persons  whose  shares  are  not 
paid  up  in  cash,  and  section  202  provides  that  all  such  promoters 
arc  answerable  to  the  company  in  damages  in  respect  of  any  in- 
accuracy or  incompleteness  in  the  above-mentioned  report ;  and 
also  that  they  have  to  refund  to  the  company  any  pecuniary  bene- 
fit conferred  by  them  to  any  person  in  connection  with  the  pur- 
chase of  the  property  of  which  no  mention  is  made  in  the  report. 
Promoters  are  released  from  these  liabilities  if  they  can  prove 
that  the  inaccuracy  or  incompleteness  of  the  report  was  neither 
known  to  them  nor  could  have  been  known  to  them  if  they  had 
applied  the  diligence  of  a  prudent  trader.  Third  parties  who 
have  received  any  benefit  not  disclosed  in  the  report  are  also 
liable  in  damages,  if  the  concealment  was  (or  under  the  circum- 
stances of  the  case  ought  to  have  been)  known  to  them.  Any 
promoter  who  knowingly  makes  any  false  statement  in  the  re- 
port in  question  is  also  punishable  with  imprisonment  and  a 
maximum  fine  of  20,000  marks  (section  313). 

(c)  Every  German  company  has  a  supervising  board  and  a 
managing  board  ;  in  the  case  of  a  "  simultaneous  "  formation 
the  first  boards  are  appointed  when  the  articles  of  association 
are  signed;  in  the  rare  case  of  a  "successive"  formation,  the 
general  meeting,  which  has  to  be  held  before  the  registration  of 
the  company,  has  to  appoint  them.  Both  these  boards  have  to 
examine  and  report  on  all  the  circumstances  of  the  formation  of 
the  company.  They  have  in  particular  to  inquire  into  the  accu- 
racy and  completeness  of  the  statements  contained  in  the  pro- 
moters' report,  and  this  inquiry  must  also  include  the  examination 
of  the  question,  whether  the  prices  at  which  any  property  to 
be  taken  over  by  the  company  are  open  to  any  objection 
(sections  192,  193). 

(//  )  In  anv  case  in  which  one  of  the  members  of  either  board  is 


400  TRUSTS,   POOLS  AND   CORPORATIONS 

a  promoter  or  derives  any  pecuniary  benefit  from  the  promotion 
of  the  company,  and  also  in  any  case  in  which  any  property  is 
to  be  taken  over  by  the  company  on  its  formation,  independent 
auditors  appointed  by  the  local  chamber  of  commerce  have  to 
examine  and  report  as  well  as  the  two  boards  and  in  the  same 
manner.  The  auditors'  report  under  the  law  of  1884  had  degen- 
erated into  a  mere  formality,  but  the  new  code  has  added  some 
provisions  which  will  make  it  much  more  effective  in  the  future. 

Under  the  new  law  the  auditors  may  ask  for  any  information 
in  connection  with  the  subject  of  their  inquiry  which  appears 
relevant  to  them,  and  in  case  of  any  dispute  with  the  promoters 
as  to  the  necessity  of  any  such  information,  the  authority  by 
whom  the  auditors  were  appointed  is  entitled  to  give  a  binding 
decision.  As  long  as  the  promoters  decline  to  give  the  informa- 
tion, the  auditors'  report  is  not  issued  and  the  incorporation  of 
the  company  cannot  take  place.  The  remuneration  payable  to 
the  auditors  is  not  fixed  by  any  person  connected  with  the  com- 
pany, but  by  the  authority  by  whom  they  are  appointed  (section 
194).  Any  agreement  to  the  contrary  is  void.  (Esser,  page  24.) 

All  the  reports  have  to  be  filed  in  the  registry  and  are  open 
to  public  inspection  (sections  195,  199).  This  right  of  inspec- 
tion is  not  taken  advantage  of  to  a  large  extent,  but  if  the 
reports  contained  any  damaging  facts  their  contents  would  soon 
be  known  to  the  public  and  prevent  them  from  taking  shares. 
As  mentioned  before,  the  simultaneous  method  of  formation  is 
almost  universally  applied,  and  under  that  method  the  promoters 
have  to  keep  the  shares  and  pay  up  in  full,  unless  the  public 
comes  forward.  This  circumstance  alone  is  a  sufficient  check 
against  purchases  of  property  at  excessive  prices. 

It  is  no  doubt  true  that  most  persons  who  take  shares  in  new 
companies  are  not  very  watchful  in  reading  reports  or  inspect- 
ing documents,  but  if  there  is  only  one  watchful  person  any 
irregularity  will  soon  be  known  in  the  circles  in  which  shares 
are  usually  placed  and  will  clamp  the  enthusiasm,  which  might 
otherwise  have  been  created  in  favor  of  the  new  issue. 

It  may  of  course  still  happen  that  the  prices  at  which  property 
is  taken  over  on  the  formation  of  a  new  company  are  too  high, 
but  the  unnatural  increase  of  these  prices  caused  by  the  com- 


GERMAN    COMPANY   LAW  401 

missions  and  profits  of  middlemen,  which  is  such  a  characteristic 
feature  of  English  company  promoting,  is  a  practical  impossi- 
bility under  the  above-mentioned  provisions. 

The  question  naturally  arises,  How  do  people  in  Germany, 
who  take  trouble  or  risk  in  the  formation  of  a  new  company, 
obtain  the  remuneration,  without  which  they  would  hardly  be 
inclined  to  enter  into  such  transactions  ?  The  answer  is  that  the 
profit  is  entirely  derived  from  the  premium  at  which  the  shares 
are  sold  to  the  public.  It  is  clear  that  the  profits  obtained  in 
this  manner  cannot  be  nearly  as  high  as  those  which  are  fre- 
quently obtained  by  the  English  methods  of  company  promotion, 
but  large  and  adequate  profits  are  frequently  obtained,  which 
nobody  can  object  to,  as  they  are  perfectly  open.  The  necessity 
of  paying  for  the  shares  before  they  are  issued  to  the  public 
shuts  out  a  certain  class  of  professional  company  promoters,  who 
may  now  be  said  to  be  non-existent  in  Germany,  but  the  starv- 
ing out  of  this  class  of  men  is  an  advantage  from  the  moral  as 
well  as  from  the  economic  point  of  view. 

The  principal  point  is  this  :  in  England  the  promoters'  and 
middlemen's  profit  is  added  to  the  nominal  capital  of  a  company, 
whilst  in  Germany  it  is  added  to  the  price  of  the  shares.  To  the 
shareholder  it  may  be  a  matter  of  indifference  whether  he  buys 
shares  from  the  promoters  at  100  per  cent  premium,  or  whether 
the  company  buys  its  assets  at  twice  their  real  value  and  sells 
him  his  shares  at  par,  but  a  creditor  is  necessarily  misled  by 
being  told  that  a  company's  paid-up  capital  is  ,£100,000,  when 
the  real  value  of  its  property  is  ,£50,000,  the  rest  consisting  of 
promoters'  profits.  Moreover,  the  necessity  of  paying  dividends 
on  a  capital  swollen  by  such  profits  leads  to  the  adoption  of  un- 
sound methods  of  trading  and  bookkeeping. 

It  has  been  suggested  that  the  provisions  requiring  the  whole 
of  a  company's  capital  to  be  taken  up  before  the  registration  of 
the  company  may  be  evaded  by  the  employment  of  dummies,  in 
whose  names  the  shares  are  taken,  the  real  promoters  remaining 
in  the  background  and  only  pocketing  the  profit  on  the  sale  ot 
the  shares  in  case  of  such  a  profit  being  realized  ;  but  such  a 
course  does  not  appear  to  be  adopted  in  practice,  and  would,  it 
adopted,  in  all  probability  defeat  its  own  object;  if  the  promot- 


402  TRUSTS,   POOLS   AND   CORPORATIONS 

ers'  report  was  signed  by  persons  willing  and  able  to  contem- 
plate their  liability  with  the  indifference  of  the  " vacuus  viator" 
the  public  would  not  be  tempted  to  take  the  shares,  and  the  real 
promoters  would  lose  their  chance  of  a  profit. 

There  are  some  other  possible  modes  of  evasion  which  have 
been  specially  guarded  against  by  the  German  law. 

It  is  enacted  by  section  207  that  all  contracts  made  within 
the  first  two  years  after  the  formation  of  the  company  for  the 
purchase  or  construction  of  any  buildings  or  plant  intended  to 
be  used  permanently  for  the  purposes  of  the  company's  business, 
or  of  any  land  or  other  immovable  property  at  a  price  exceed- 
ing one-tenth  of  the  company's  capital,  are  invalid  unless  con- 
firmed at  a  general  meeting  in  a  special  manner  which  enables 
shareholders  holding  only  26  per  cent  of  the  company's  capital 
to  defeat  the  scheme. 

A  report  must  be  presented  to  the  meeting  by  the  supervising 
board,  which,  together  with  the  contract,  must,  in  case  of  adop- 
tion by  the  meeting,  be  filed  in  the  mercantile  registry.  The 
members  of  the  supervising  board  are,  according  to  section  208, 
responsible  for  the  contents  of  this  report  in  the  same  way  as 
they  are  responsible  for  the  original  report  on  the  formation  of 
the  company. 

In  the  case  of  an  increase  of  capital,  sections  278  and  279 
provide  for  similar  safeguards  as  those  existing  with  regard  to 
the  original  formation  of  a  company. 

B.  —  PROVISIONS  PRESENTING  A  DIMINUTION  OF  THE  PROPERTY 

REPRESENTING    A    COMPANY'S    CAPITAL 

The  measures  which  are  taken  for  the  purpose  of  assuring 
that  the  amount  of  the  original  capital  of  a  company  is  truly 
represented  by  the  value  of  its  property  are  insufficient,  unless 
they  are  accompanied  by  measures  preventing,  as  far  as  possible, 
the  diminution  of  the  capital  during  the  subsequent  stages  of 
the  company's  existence.  In  this  respect  also  the  provisions  of 
English  law  are  hopelessly  inadequate.  The  courts  have  indeed 
frequently  laid  down  the  rule  that  dividends  must  not  be  paid 
out  of  capital,  but  the  payment  of  dividends,  notwithstanding 


GERMAN   COMPANY   LAW  403 

the  contemporaneous  diminution  or  depreciation  of  that  part  of 
its  property  which  is  called  "fixed  capital  "  is  considered  legiti- 
mate and  cannot  be  prevented. 

A  trust  company  holding  stock,  which  during  the  last  business 
year  has  paid  50  per  cent  dividend,  but  before  the  end  of  the 
year  became  utterly  worthless,  may  include  the  50  per  cent  in 
its  yearly  profit,  without  deducting  a  penny  for  the  depreciation 
of  the  property  from  which  this  profit  was  derived.  This  is  not 
called  paying  dividends  out  of  capital.1  A  company,  owning  a 
mining  lease,  may  include  the  proceeds  of  the  minerals  extracted 
in  each  year  in  the  profit  of  that  year  and  value  the  mine  at  cost 
price  in  its  balance  sheet,  although  in  the  course  of  a  few  years 
the  mine  will  be  worthless  and  the  lease  will  have  expired. 
This  is  not  paying  dividends  out  of  capital.2  A  company  having 
paid  ,£100,000  for  good  will  and  earning  an  income  of  ^1000 
with  every  prospect  of  earning  nothing,  or  less  than  nothing,  in 
the  following  year,  may  divide  the  profit  as  dividend,  whilst  the 
good  will  is  still  valued  at  ,£100,000.  This  is  not  paying  divi- 
dends out  of  capital. 

The  distinction  between  the  depreciation  of  fixed  and  circu- 
lating capital,  which  is  the  basis  of  these  decisions,  is  unsound 
from  a  mercantile  point  of  view. 

Income  derived  from  any  source,  which  by  furnishing  the  in- 
come becomes  gradually  exhausted,  cannot  be  wholly  considered 
as  income.  It  is  partly  income  and  partly  re-payment  of  capital, 
like  a  terminable  annuity.  There  is  hardly  any  property,  classed 
as  fixed  capital,  which  is  not  of  a  wasting  nature.  In  some  cases 
the  wasting  process  is  very  slow,  in  some  cases  it  is  very  fast, 
but  the  rate  of  waste  can  be  generally  calculated  with  sufficient 
accuracy  to  enable  a  trader  to  write  off  the  proper  amount  for 
depreciation. 

If  it  was  really  correct  to  disregard  the  depreciation  of  the 
fixed  part  of  the  capital  in  the  calculation  of  the  profits,  the 
total  disappearance  of  such  property  would  not  have  to  be  con- 
sidered either  ;  new  buildings  and  machines  would  have  to  be 
provided  and  their  cost  added  to  the  "  Buildings  and  Machinery 


404  TRUSTS,    POOLS   AND   CORPORATIONS 

Account,"  but  the  demolished  buildings  and  the  disused  machin- 
ery could  still  be  valued  at  cost  price.  In  the  case  of  a  private 
partnership  such  a  mode  of  trading  would  invariably  lead  those 
who  adopt  it  into  the  bankruptcy  court,  if  it  were  persisted  in 
for  any  length  of  time,  but  in  the  case  of  a  private  partnership, 
the  fact  that  retiring  partners  must  from  time  to  time  be  paid  out 
on  the  basis  of  the  balance  sheet  of  the  last  year,  acts  as  an 
effective  check  against  the  overvaluation  of  permanent  invest- 
ments. 

In  the  case  of  companies  omitting  to  provide  for  the  waste, 
new  capital  must  of  course  be  required  from  time  to  time,  and 
such  new  capital  may  up  to  a  certain  point  be  furnished  by  a 
confiding  public  on  the  strength  of  the  forced  dividends,  but  the 
crash  will  inevitably  come  some  day. 

Another  objection  against  the  distinction  between  the  two 
kinds  of  capital  is  pointed  out  by  Mr.  Palmer  (one  of  the  most 
experienced  company  lawyers  in  this  country):  "  It  is  extremely 
difficult  to  determine  what  is  and  what  is  not  fixed  capital. 
Thus  shares  or  other  assets  are  sometimes  bought  by  a  company 
without  any  distinct  determination  whether  they  shall  be  kept  or 
resold  .  .  .  further  intentions  change.  Supposing  a  company 
formed  to  buy,  sell,  hold  by  way  of  investment,  and  deal  in 
shares  and  that  it  holds  some  shares  intending  at  the  time  to  sell, 
they  are  circulating  capital,  but  if  they  happen  to  fall  in  price, 
the  company  may  determine  to  keep  them  and  thereupon  they 
become  fixed  capital,  and  a  few  months  afterwards  the  company 
may  determine  to  sell  them  and  thereupon  they  again  become  cir- 
culating capital."  (Company  Precedents,  Part  lathed.,  page  540.) 

The  distinction  which  the  courts  have  made  between  circu- 
lating and  fixed  capital  and  the  rule  which  they  have  laid  down, 
according  to  which  a  company  may  continue  paying  dividends 
notwithstanding  the  gradual  disappearance  of  its  "  fixed  "  capi- 
tal, have  had  the  further  consequence,  that  the  notion  of  a  per- 
manent fund  on  which  the  creditors  of  a  limited  company  can 
rely,  has  been  entirely  abandoned.  This  was  shown  in  a  very 
recent  case,1  in  which  it  was  held  that  a  loss  shown  on  the 
working  of  a  particular  year,  for  which  no  reserve  is  available, 


GERMAN    COMPANY    LAW  405 

need  not  be  replaced  from  the  profit  of  the  following  year.  The 
result  of  this,  translated  into  bookkeeping  language,  is,  that  a 
debit  balance  on  the  profit  and  loss  account  may  be  carried 
forward  as  an  asset  in  the  balance  sheet,  and  that,  whilst  this  is 
done,  dividends  may  be  divided  among  the  shareholders.  By 
judicious  bookkeeping  a  company  may  easily  arrange  to  have  a 
profit  in  each  alternate  year  and  a  loss  in  each  following  year. 
The  loss  diminishes  the  capital,  and  the  profit  goes  to  the  share- 
holders until  the  capital  is  exhausted.  A  law  which  allows  such 
a  state  of  things  turns  limited  liability  into  a  source  of  serious 
public  danger.  From  the  point  of  view  of  common  business 
prudence  the  following  rules  ought  to  be  strictly  maintained  : 
a  sum  representing  the  depreciation  of  a  company's  property, 
whether  acquired  for  permanent  investment  or  for  the  purpose 
of  resale,  should  be  deducted  from  the  profits  in  each  year,  and 
either  credited  to  a  depreciation  account  or  deducted  from  the 
amount  at  which  such  property  was  previously  valued.  If  on 
the  working  of  a  year  a  loss  is  shown  which  cannot  be  met  out 
of  any  reserve  fund,  that  loss  must  be  carried  forward  on  profit 
and  loss  account,  but  no  dividends  can  be  paid  until  such  debit 
balance  has  disappeared  from  the  books. 

Some  difficulty  arises  as  to  the  question,  What  constitutes 
depreciation  ?  Is  it  the  natural  wear  and  tear  and  the  gradual 
disappearance  of  the  object  only,  or  is  it  also  the  diminution  in 
market  or  selling  value  produced  by  other  causes  ?  In  this 
respect  the  distinction  between  fixed  and  circulating  capital 
offers  some  guidance. 

As  regards  property,  such  as  buildings  and  machinery,  bought 
or  constructed  for  the  purpose  of  being  retained  and  used  for  the 
permanent  purposes  of  the  company,  the  selling  value  is  not 
really  of  importance  ;  the  durability  or  usefulness  of  any  such 
property  is  not  affected  by  the  conditions  which  affect  the  price, 
at  which  it  can  be  sold,  and  the  company  is  not  any  poorer  be- 
cause it  is  unable  to  sell  such  property  at  cost  price  ;  as  regards 
property  bought  or  manufactured  for  the  purpose  of  being  sold 
or  resold,  it  is  of  course  necessary  to  consider  the  market  price, 
which  is  the  only  tests  of  its  value.  The  two  classes  of  property 
just  mentioned  do  not  a.;  a  rule  exhaust  the  whole  of  a  company's 


406  TRUSTS,   POOLS  AND   CORPORATIONS 

property  ;  book  debts,  which  do  not  belong  to  either  class,  are 
frequently  an  important  item.  It  is  generally  recognized  in  this 
country  that  a  reduction  ought  to  be  made  with  reference  to  bad 
and  doubtful  debts,  but  great  laxity  prevails  with  reference  to 
debts  payable  in  a  foreign  paper  currency  or  in  a  currency 
based  on  silver ;  it  is  customary  for  bookkeeping  purposes  to 
convert  these  debts  into  sterling  currency  at  a  fixed  rate  of  ex- 
change, and  this  fixed  rate  is  sometimes  called  the  "  par  value  " 
—  as  if  there  could  be  a  par  value  between  a  metallic  currency 
and  a  paper  currency,  or  between  a  gold  currency  and  a  silver 
currency.  There  is,  then,  in  such  cases  a  tendency  to  disregard 
all  fluctuations  and  to  retain  the  old  rate  of  conversion,  al- 
though it  differs  materially  from  the  actual  rate.  In  cases 
where  such  debts  are  only  of  occasional  occurrence  this  is  not  so 
important,  but  in  the  case  of  companies  whose  principal  out- 
standings  remain  permanently  in  foreign  countries,  the  conse- 
quences may  be  very  serious;  an  English  company  having 
outstandings  of  a  permanent  nature  in  Brazil  and  converting 
them  into  sterling  money  at  the  old  rate  of  24^.,  whilst  the  pres- 
ent rate  is  about  8^.,  is  doing  exactly  the  same  thing  as 
if  they  valued  their  outstanding  debts  at  their  full  value,  not- 
withstanding the  fact  that  two-thirds  of  the  same  were  known  to 
be  absolutely  irrecoverable;  yet  English  law  seems  to  allow 
this  system  of  bookkeeping,  and  the  payment  of  dividends  can- 
not be  prevented,  although  the  company's  capital  is  dwindling 
away  by  the  depreciation  of  the  currency  in  which  it  is  invested. 

As  regards  stock-exchange  securities  bought  for  permanent 
investment,  it  may  be  somewhat  inconsistent  to  prescribe  de- 
ductions in  respect  of  loss  of  market  value,  but  such  deductions 
are  prudent,  especially  in  cases  where  the  fall  in  the  market 
price  is  due  to  causes  materially  affecting  their  intrinsic  value. 
When,  e.g.,  a  stock-exchange  security  has  ceased  to  pay  dividends, 
it  ceases  to  serve  the  purpose  of  investment. 

The  German  law  proceeds  on  the  principles  for  which  I  have 
contended  in  the  foregoing  observations.  Section  261  enacts 
that  (subject  to  the  modifications  to  which  I  shall  have  to  refer) 
the  provisions  contained  in  the  mercantile  code  as  to  the  balance 
sheets  of  traders  generally  are  to  be  observed  ;  according  to  these 


GERMAN    COMPANY   LAW  407 

provisions  all  assets  and  liabilities  must  be  taken  at  the  value, 
which  they  had  on  the  date,  as  from  which  the  balance  sheet  is 
made  out;  debts  must  be  taken  at  their  probable  value  and 
irrecoverable  debts  be  written  off  entirely.  The  modifications  in 
the  case  of  the  balance  sheets  of  companies  are  the  following  : 

(1)  Stock-exchange    securities    and    goods    having   a    stock- 
exchange  or  market  value  must  be  taken  at  such  stock-exchange 
or  market  price,  if  such  stock-exchange  or  market  price  is  below 
the  cost  price ;  in  any  other  case  they  are  to  be  taken  at  cost 
price. 

(2)  Other  assets  are  to  be  taken  at  a  price  not  exceeding  the 
cost  price. 

(3)  Buildings  and  plant  and  other  property  not  intended  to 
be  sold  or  resold,  and  being  used  for  the  permanent  purposes 
of  the  company's  business,  may,  notwithstanding  the  fact  that 
their  actual  value  is  smaller,  be  taken  at  cost  price,  provided  a 
sufficient    amount    is    written    off  or  placed    to    a   depreciation 
account,  by  which  the  loss  by  waste  or  wear  and  tear  is  provided 
for. 

(4)  Promotion  or  administration  expenses  may  not  be  included 
among  the  assets. 

(5)  The  amount  of  the  capital  and  of  all  reserve  and  depre- 
ciation funds  must  be  included  among  the  liabilities. 

(6)  The    profit    or  loss    resulting  from    a  comparison  of  the 
assets  with  the  liabilities  must  be  stated  separately  at  the  end 
of  the  balance  sheet. 

It  will  be  noticed  from  these  rules  that  no  asset  may  be  valued 
above  cost  price,  even  in  a  case  where  the  actual  value  is  above 
cost  price  ;  this  provision  does  not  appear  very  logical  at  first 
sight,  and  it  may  be  urged  that  it  is  just  as  wrong  to  under- 
value the  assets  as  to  overvalue  them  ;  as  regards  the  latter 
observation  it  is  obvious  that  the  only  persons  damaged  by  an 
undervaluation  are  particular  classes  of  shareholders  or  directors 
or  managers,  whose  remunerations  vary  with  the  profits,  whilst 
air  overvaluation,  as  I  have  shown  above,  causes  an  injury, 
not  only  to  the  solidity  of  the  company  and  to  the  interests  of  its 
creditors,  but  also  to  its  competitors  and  the  public  generally, 
through  the  encouragement  which  it  Drives  to  unsound  trading. 


408  TRUSTS,   POOLS  AND   CORPORATIONS 

There  is  therefore  much  more  inducement  to  provide  against 
overvaluation  and  to  disregard  the  risk  of  undervaluation  which, 
considering  the  many  temptations  in  favor  of  high  dividends, 
operating  on  the  directors  and  managers  of  a  company,  is  really 
not  very  serious.  The  illogical  nature  of  the  provisions  in  ques- 
tion cannot  be  entirely  denied,  but  it  was  thought  prudent  that 
a  company  should  not  pay  dividends  out  of  unrealized  profits, 
having  also  regard  to  the  fact  that  the  stock-exchange  price  or 
market  price  is  not  always  quite  genuine,  and  may  easily  be  sent 
up  by  fictitious  transactions  for  the  very  purpose  of  enabling 
a  company  to  value  securities  or  goods  at  a  price  producing  a 
profit  available  for  the  company's  dividends. 

One  of  the  consequences  of  the  rule,  that  no  asset  can  be 
taken  above  cost  price,  is  that  assets  which  were  acquired 
gratuitously  cannot  be  valued  at  anything.  Some  writers  have 
asked,  why  a  company  who  had  received  any  property  by  way 
of  gift  should  not  be  able  to  include  their  value  among  its 
assets;  but  it  is  hardly  worth  while  to  consider  this  point,  as 
generous  benefactors,  who  give  away  their  savings  to  trading 
companies,  are  freaks  of  nature  which  need  not  trouble  the 
legislator's  mind. 

A  company  which  acquires  the  good  will  of  a  business  for 
valuable  consideration,  may  value  such  good  will  for  its  balance 
sheet  at  cost  price,  subject  to  the  proper  deduction  for  deprecia- 
tion, but  it  cannot  value  its  own  good  will  if  nothing  was  paid 
for  it.  (See  Ring,  pages  46,  602,  613.) 

The  German  code  does  not  lay  down  any  rule  as  to  the  manner 
in  which  depreciation  by  wear  and  tear  and  waste  ought  to  be 
calculated.  In  some  cases  the  natural  depreciation  is  obvious, 
as  in  the  cases  of  leases  or  patents  expiring  after  a  certain  number 
of  years.  The  rate  of  depreciation  in  the  case  of  buildings, 
machinery,  etc.,  can  also  be  easily  ascertained  with  the  advice 
of  experts  ;  in  other  cases,  common  sense  and  prudence  will 
usually  find  a  way  out  of  the  difficulty.  As  regards  good  will, 
depending  on  personal  efforts  and  qualities,  a  somewhat  rapid 
rate  of  depreciation  ought  to  be  allowed  for ;  where  good  will  is 
attached  to  particular  premises,  as  in  the  case  of  inns  and  hotels, 
its  value  is  not  generally  taken  as  a  separate  item,  but  included 


GERMAN    COMPANY    LAW  409 

in  the  value  of  the  premises.  For  these  reasons  the  item  ot 
good  will  is  not  frequently  seen  in  the  balance  sheets  of  German 
companies. 

Another  rule  of  law,  which  tends  to  the  preservation  of  the 
capital  of  German  companies,  is  contained  in  section  262,  which 
provides  that  a  reserve  is  to  be  formed  in  the  following  way  : 
( i)  at  least  one-twentieth  part  of  the  net  profit  of  each  year  is  to 
be  credited  to  this  fund,  until  it  shall  have  reached  the  tenth 
part  of  the  company's  capital,  or  such  larger  part  of  such  capital, 
as  shall  be  provided  in  the  articles  ;  (2)  in  addition  to  this,  any 
net  premium  realized  by  the  issue  of  any  part  of  the  company's 
capital  must  be  placed  to  the  reserve  fund,  as  well  as' (3)  any 
amounts  paid  by  shareholders  in  consideration  of  any  preferen- 
tial rights  accorded  to  their  shares  (unless  such  payments  are 
used  for  the  purpose  of  making  good  any  special  losses). 

The  statutory  reserve  fund  cannot  be  used  for  the  payment  of 
dividends  in  bad  years,  but  separate  reserve  funds  may  be 
formed  for  that  purpose.  (Esser,  page  164;  Ring,  page  631.) 

The  provisions  which  I  have  hitherto  discussed  are  intended 
to  prevent  the  following  mischiefs  : 

(1)  The  watering  of  the  original  capital. 

(2)  The   dwindling    away  of    the    company's    assets    by    the 
omission  of  any  allowance  for  their  depreciation  in  the  balance 
sheets. 

They  cannot,  of  course,  prevent  the  gradual  disappearance  of 
the  company's  capital  by  losses  in  business  in  cases  in  which 
profits  cease  altogether,  but  there  are  provisions  which  prevent 
a  company  from  carrying  on  business  after  a  considerable  part 
of  its  assets  have  been  lost. 

It  is  provided  by  section  240  : 

(1)  That  if,  on  the  drawing  up  of  any  yearly  or  intermediate 
balance  sheet,  it  appears  that  one-half  of  the  company's  capital 
has  been  lost,  the  managing  board  must   immediately  convene 
a  general   meeting,  to  whom  the  state  of  facts  has  to  be  sub- 
mitted. 

(2)  That  in  the  case  of  the  insolvency  of  the  company,  and 
also   in   the  case  of  any  yearly   or  intermediate  balance   sheet, 
disclosing  the  fact,  that  the  liabilities  of  the  company  exceed  its 


410  TRUSTS,   POOLS   AND    CORPORATIONS 

assets,  it  is  the  duty  of  the  managing  board  to  initiate  bank- 
ruptcy proceedings  without  delay.  A  disregard  of  this  provi- 
sion is  punishable  with  three  months'  imprisonment  and  a  fine 
(section  315-2). 

There  are  no  similar  rules  in  English  law  ;  in  the  case  of 
insolvency,  winding-up  proceedings  are  of  course  taken  as  a 
general  rule,  but  the  mere  fact  that  the  assets  are  insufficient  to 
pay  its  debts,  does  not  prevent  a  company  from  continuing 
business.  As  long  as  a  company  can  pay  its  way  by  the  use  of 
credit  or  otherwise,  so  long  it  can  continue  to  trade  in  this 
country  ;  in  some  lucky  cases,  this  may  enable  it  to  retrieve  its 
losses  and  to  start  a  more  prosperous  career,  but  in  the  larger 
number  of  instances,  a  company,  having  reached  such  a  low 
condition,  has  to  procure  accommodation  on  terms  so  onerous 
that  the  chances  of  profitable  trading  are  very  much  reduced. 
The  German  rule  is  therefore  preferable  in  the  interest  of 
creditors  and  of  the  general  public. 

The  German  law  on  stock-exchange  transactions  passed  in 
1896  has  no  such  wide  purposes  as  the  above-quoted  sections  of 
the  mercantile  code  relating  to  companies  ;  its  only  object  was 
to  hinder  certain  kinds  of  stock-exchange  speculations  ;  in  so 
far  as  it  deals  with  shares  in  companies,  it  refers  not  merely  to 
shares  in  German  companies,  but  to  shares  generally,  nor  does  it 
refer  to  all  dealings  in  such  shares,  but  'only  to  dealings  on 
any  authorized  stock  exchange.  In  England  the  stock  exchanges 
can  at  their  discretion  make  rules  as  to  the  conditions,  under 
which  a  settlement  or  quotation  is  granted  to  any  shares 
or  debentures  or  other  securities,  and  this  was  also  the  case 
in  Germany  prior  to  1896,  but  since  the  statute  of  that  date, 
the  stock-exchange  rules  are  partly  fixed  by  law.  The  pro- 
visions in  question  have  therefore  no  direct  connection  with 
company  law,  but  as  they  have  to  be  considered  on  the  forma- 
tion of  a  company,  whose  shares  are  to  be  dealt  in  on  the  stock 
exchanges,  and  also  on  any  increase  of  its  capital,  some  refer- 
ence must  be  made  to  them. 

The  rules  in  question  prescribe  : 

(i)  The  compulsory  issue  of  a  prospectus,  the  authors  of 
which  are  under  a  specially  stringent  liability  ; 


GERMAN   COMPANY   LAW  411 

(2)  The  lapse  of  a  space  of  time  between  the  incorporation 
of  the  company  and  the  public  issue  of  its  shares  ; 

(3)  The  fixing  of  a  minimum   capital   for  companies  whose 
shares  are  to  be  dealt  in  on  any  stock  exchange. 

As  regards  the  issue  of  a  prospectus,  it  is  provided  by  section 
38  of  the  statute,  that  before  any  security  is  admitted  for  the 
purpose  of  being  dealt  in  and  quoted  on  any  stock  exchange, 
a  prospectus  must  be  issued,  containing  all  information,  which 
is  of  any  importance  for  the  purpose  of  ascertaining  its  true 
value.  German  government  securities  are  exempted,  and  other 
securities  may  be  exempted  by  the  government  of  the  state  in 
which  the  application  is  made,  but  all  shares  in  companies, 
whether  incorporated  in  Germany  or  elsewhere,  are  included  in 
any  case. 

It  was  already  provided  by  the  mercantile  code,  that  persons 
issuing  a  prospectus  by  which  shares  are  offered  within  two 
years  from  the  incorporation  of  a  company,  are  liable  in  damages 
in  respect  of  inaccuracies  or  omissions  in  such  prospectus.  This 
liability  can  be  enforced  by  the  company  only,  whilst  the  liability 
imposed  by  the  stock-exchange  statute  in  respect  to  misstate  - 
ments  in  the  prospectus  can  be  enforced  by  any  holder  of  the 
security  to  which  the  prospectus  refers.  According  to  section 
43  of  that  statute  all  persons  who  have  issued  or  directed  the 
issue  of  any  prospectus  containing  any  inaccurate  statement  on 
any  matter  affecting  the  value  of  the  security  are  jointly  and 
separately  liable  for  any  loss  caused  thereby,  in  so  far  as  they 
knew,  or  ought  in  the  absence  of  gross  carelessness  to  have 
known,  that  the  statement  was  incorrect.  In  the  same  way 
they  are  liable  in  respect  of  omissions  as  to  essential  facts,  if 
caused  by  them  knowingly  or  recklessly.  If  the  inaccuracy  or 
incompleteness  was  known  to  the  claimant  at  the  time  of  the 
purchase,  or  ought  to  have  been  known  to  him,  on  the  applica- 
tion of  the  care  usually  given  to  his  own  affairs,  he  loses  his 
claim  to  damages  or  restitution. 

As  regards  the  interval  of  time  which  must  elapse  before  a 
company's  shares  can  be  dealt  in  on  a  German  stock  exchange, 
it  is  provided  by  section  39  that  the  shares  of  any  undertaking 
which  has  been  converted  into  a  company  cannot  be  admitted 


412  TRUSTS,   POOLS  AND   CORPORATIONS 

among  the  securities  negotiable  on  any  German  stock  exchange, 
unless  at  least  a  year  has  elapsed  from  the  date  of  the  registra- 
tion of  the  company,  and  unless  the  first  yearly  balance  sheet 
of  the  company  has  been  published  together  with  the  profit  and 
loss  account.  Power  is  given  to  the  state  government  of  the 
place  in  which  the  shares  are  to  be  dealt  in,  to  dispense  from 
this  rule  in  exceptional  cases.  It  will  be  noticed  that  this  close 
time  is  only  prescribed  in  the  case  of  companies  taking  over  an 
existing  business ;  the  shares  of  a  company  starting  a  new  busi- 
ness may  be  publicly  dealt  in  at  once.  The  wisdom  of  the  rule 
is  very  doubtful.  A  company  cannot  be  registered  before  its 
capital  is  fully  subscribed.  The  promoters  must  therefore  hold 
the  whole  of  the  shares  for  at  least  a  year  and  probably  some 
months  longer,  as  in  most  cases  some  time  will  elapse  after  the 
end  of  the  year  before  the  balance  sheet  can  be  drawn  up  and 
published  ;  some  compensation  must,  of  course,  be  sought  for  the 
prolongation  of  the  risk  and  capital  outlay,  and  this  compensa- 
tion has,  of  course,  to  be  paid  by  the  public.  On  the  other 
hand  the  safeguard  is  purely  imaginary.  By  judicious  manipu- 
lation profits  belonging  to  a  former  year  or  to  the  subsequent 
year  may  be  squeezed  into  the  critical  twelve  months,  so  as  to 
produce  a  specially  good  profit  and  loss  account,  and  the  idea 
that  the  public  in  this  way  have  an  opportunity  to  see  the  work- 
ing of  the  undertaking  before  they  are  asked  to  subscribe  to  it 
is  therefore  purely  imaginary. 

The  third  regulation  introduced  by  the  stock-exchange  statute 
is  intended  to  prevent  stock-exchange  transactions  in  the  shares 
of  companies  having  a  small  capital  only.  The  fixing  of  the 
minimum  capital  for  each  stock  exchange  is  left  to  the  federal 
council  by  section  42,  which  section  also  gives  power  to  the  same 
body  to  make  further  regulation  for  the  admission  of  securities 
to  any  stock  exchange. 

An  order  was  issued  by  the  federal  council  pursuant  to  this 
power,  containing  the  following  provisions: 

fi)  The  minimum  capital  of  companies  whose  shares  are  to 
be  dealt  in  at  Berlin,  Hamburg  or  Frankfort  must  be  ,£50,000, 
whilst  for  all  other  stock  exchanges  a  minimum  capital  of 
^25,000  is  fixed. 


GERMAN    COMPANY    LAW  413 

(2)  The  prospectus  must  state  (a)  the  name  of  the  company, 

(b)  the  clause  in  the  articles  or  resolution  authorizing  the  issue, 

(c)  the- purposes  for  which  the  proceeds  of  the  issue  are  to  be 
applied,  (cl)  the  amount  of  the  total  issue,  the  amount  offered, 
and  the  amount  retained,  and  the  time  during  which  the  last- 
named  amount  is  to  be  retained  by  the  promoters. 

The  provisions  about  statements  in  prospectuses  and  dealings 
on  the  stock  exchanges  are  of  minor  importance  and  affect  a 
limited  class  only ;  those  relating  to  the  prevention  of  over- 
capitalization and  the  preservation  of  capital  affect  the  whole 
trade  of  the  country.  It  is  stated  on  good  authority  that  some 
branches  of  trade  (such  as  the  cycle  industry)  are  rapidly  going 
down  in  England  owing  to  the  fact  that  they  are  worked  by 
overcapitalized  companies.  This  will  show  that  the  reform  of 
company  law  has  other  objects  than  the  protection  of  careless 
persons  against  unsound  investments.  If  this  fact  could  be 
understood  and  realized  by  public  opinion,  it  would  be  seen  that 
measures  like  those  proposed  in  the  bill  which  is  now  before 
Parliament  touch  the  real  mischief  as  little  as  the  previous 
voluminous  legislation  on  the  subject. 

ERNEST  SCHUSTER. 


XVII 
THE   NEW   COMPANIES   ACT,    igoo1 

THE  wickedness  of  the  company  promoter  is  no  new  thing : 
in  the  wild  bubble  craze  of  1715  one  gentleman  proposed 
to  float  a  bubble,  or  company,  to  import  jackasses  from  Spain, 
and  another  a  company  for  a  purpose  "  to  be  disclosed  hereafter," 
and  decamped  in  the  evening  with  his  pocket  full  of  guineas ; 
but  at  the  same  time  it  is  the  adoption  of  the  principle  of  limited 
liability  which  has  given  the  company  promoter  his  great  oppor- 
tunity. That  principle  is  now  so  familiar  that  it  is  difficult  to 
realize  how  modern  it  is  —  in  fact,  not  yet  fifty  years  old.  Since 
1862,  when  previous  tentative  experiments  of  Parliament  were 
reconsidered  and  embodied  in  the  Code  Napoleon  of  the  limited 
company,  there  have  been  numerous  amending  Acts,  but  it  is 
only  within  the  last  six  or  seven  years  that  public  opinion,  of  the 
city  prince  no  less  than  of  the  country  parson,  has  demanded 
radical  reform. 

The  late  Lord  Chief  Justice  brought  before  the  public  in  1898 
some  startling  figures.2  During  the  seven  years  from  1891  to 
1897,  28  millions  of  money  was  lost,  20  odd  to  shareholders,  and 
.7  to  creditors.  These  figures,  though  much  quoted,  require  very 
considerable  correction,  for  they  are  at  the  same  time  too  com- 
prehensive, and  not  comprehensive  enough  ;  on  the  one  hand 
Lord  Russell  took  no  account  of  the  losses  made  by  companies 
wound  up  voluntarily  and  not  under  the  jurisdiction  of  the  Court, 
and  if  these  be  added,  the  average  annual  loss  for  the  five  years 
ending  December,  1897,  works  out  at  12  millions  of  money  at 

1  From  the  Economic  journal,  Vol.  XI,  1901,  pp.  180-192.  The  substance  of 
this  paper  was  fielivi.-rt.-d  as  a  lecture  at  the  Lotvl'm  Chamber  of  Commerce,  the 
President,  W.  Sandeman,  Ksq.,  in  the  Chair,  un  Wednesday,  Nov.  21,  1900. 

-  See  Times,  Xuv.  10,  1898. 

414 


THE   NEW   COMPANIES  ACT,    1900  415 

the  least.1  On  the  other  hand,  the  whole  basis  on  which  these 
figures  of  assumed  loss  are  calculated  is  unsound ;  for  much  of 
the  apparent  loss  of  capital  on  winding  up  is  compensated  by 
schemes  of  subsequent  reconstruction  or  amalgamation.2 

The  law  allows,  no  doubt,  far  greater  freedom  in  England 
than  is  possible  abroad  ;  anything,  for  instance,  like  the  "  simul- 
taneous formation  "  usually  employed  in  Germany,  where  the 
promoters  must  themselves  take  all  the  shares,  would  not  be 
tolerated  here  for  a  moment ;  and  many  have  felt  there  is  a  grave 
danger  in  sacrificing  any  portion  of  this  freedom. 

"  Restrictive  provisions  which  may  have  the  effect  of  either 
curtailing  the  facilities  for  the  formation  of  companies  which 
bring  so  much  business  to  England,  or  of  embarrassing  the 
administration  of  companies,  or  deterring  the  best  class  of  men 
from  becoming  Directors,  are  not  to  be  lightly  entertained."3 

In  1894  a  Department  Committee  presided  over  by  Lord 
Davey  was  appointed  and  reported  in  i895:4  the  Committee 
received  memoranda  from  many  Chambers  of  Commerce  and 
other  public  bodies  throughout  the  United  Kingdom,  and  took 
evidence  as  to  the  law  of  companies  in  France,  Germany  and 
America,  and  may  be  said  to  have  brought  within  the  four  cor- 
ners of  a  blue  book  every  suggestion  that  the  wit  of  man  has 
ever  heard,  thought  or  dreamt  of  in  connection  with  Company 
Law  Reform.  The  Committee  at  the  end  of  their  report  sub- 
mitted a  draft  bill  of  49  clauses  :  this  Bill  was  examined  by  a 
committee  of  the  House  of  Lords  in  1897,  and  two  following 
years,  and  was  finally  introduced  into  Parliament  by  the  Secre- 

1  Eighth  General  Annual  Report  by  the  Board  of  Trade  in  companies  winding  up 
in  lS()<),  p.  (i  ;  see  also  return  of  Joint  Stock  Companies,  August,  1890,  pp.  326-329. 

-  This  the  Hoard  of  Trade  officials  are  the  first  to  admit;  see  Eighth  General 
Annual  Report,  sit/',  cit,.  p.  6.  How  much  apparent  loss  is  so  made  good  the  Board 
of  Trade  Report  savs  it  is  impossible  to  estimate. 

;i  Report  of  Lord  Davev's  Committee,  iS<)^,  p.  vi.  Evidence  was  produced  before 
that  committee  that  the  paid-up  capital  of  companies  in  England  amounted  in  1894 
to  10^5  millions  sterling,  of  companies  in  Era  nee  to  420  millions,  and  of  German 
companies  to  300  millions,  giving  a  surplus  to  English  companies  over  the  other  two 
countries  of  }i^  millions. 

4  The  committee  consisted  of  thirteen  nanvs,  all  of  the  highest  authority  in  the 
world  of  commerce  and  law,  amongst  them.  Lord  Justice  Yaughan  Williams,  Mr. 
Justice  Buckley,  Mr.  Palmer,  Mr.  John  Holhms  and  Sir  Albert  Rullit. 


416  TRUSTS,   POOLS  AND    CORPORATIONS 

tary  to  the  Board  of  Trade  last  summer  and  passed  into  law : 
every  clause  in  the  Bill  has  been  tossed  to  and  fro  a  hundred 
times ;  outworks  against  roguery  skilfully  run  up  by  Mr.  Palmer 
one  day  were  swept  away  by  the  flood  of  Mr.  Justice  Buckley's 
caustic  criticisms  the  next :  every  line  of  the  Bill  has  been 
swamped  in  a  flood  of  discussion  and  printers'  ink  :  it  is  sad  that 
after  such  a  lengthy  period  of  incubation  the  legislative  chicken 
has  emerged  so  imperfectly  shaped. 

The  result  of  all  this  discussion  has  of  course  been  a  compro- 
mise, and  the  original  49  sections  have  now  shrunk  to  36. 
The  discussions  on  the  Bill  revealed  general  agreement  as  to  the 
more  serious  mischief  to  be  remedied,  and  it  is  worth  while  to 
enumerate  the  prominent  ones. 

1.  The  One  Man  Company.  —  In  order  to  secure  registration 
with  limited  liability  the  Act  of  1862  requires  the  signatures  of 
seven1  persons  to  the  original  memorandum  of  incorporation, 
each  taking  one  share  in  the  company,   but  up  to  the  present 
English  law  has  taken  no  heed  whether  those  seven  signatories 
are  dummies  or  no  ;  that  company  may  be  really  constituted  by 
one  man  who  pays  the  first  subscription  for  each  of  the  other 
six,  and  so  secures  their  signatures.2 

2.  Insufficient   Subscription.  —  Many    companies    proceed   to 

1  In  Germany,  since  1892,  limited  liability  partnerships  —  Gesellschaften  mil  be- 
schrankter  Haftung — may  exist.  American  law,  of  course,  varies:  in  the  state  of 
New  Jersey  "three  or  more  persons  may  become  a  corporation"  (i.e.  a  company), 
Revision  of  1896,  Sec.  6:  three  also  are  sufficient  for  incorporation  in  the  state  of 
New  York,  Law  of  1890,  Sec.  2:  Lord  Justice  Lindley  advocated  that  one  person 
should  be  allowed  the  privileges  of  incorporation  provided  he  wrote  Limited  after 
his  name. 

-  This  is  the  result  of  the  decision  of  the  House  of  Lords  in  Aron  Solomon's 
case  in  1896.  Solomon  floated  off  his  business  as  a  leather  merchant  into  a  com- 
pany consisting  of  himself,  and  his  wife  and  daughter  and  four  sons,  from  whom  lie 
received  in  payment  ^20,000  in  shares,  and  ,£10,000  in  debentures,  with  a  floating 
charge  over  the  whole  business;  he  was  managing  director  and  could  outvote  the 
other  six  signatories,  and  by  means  of  his  debentures  come  in  with  priority  in  a  wind- 
ing up  over  ordinary  creditors;  when  the  inevitable  winding  up  came  the  liquidator 
tried  to  get  the  whole  set  aside  as  futile  in  law  and  fraudulent  in  fact,  that  it  was  no 
company,  but  one  man  attempting  to  evade  the  ordinary  law  of  bankruptcy  and  trade 
with  limited  liability  by  means  of  six  dummies.  Mr.  Justice  Yaughan  Williams  and 
the  Court  of  Appeal  sympathi/ed  with  the  liquidator,  but  the  House  of  Lords  held 
that  the  Act  was  satisfied  \\ith  actual  signatories  whatever  their  motives. 


THE    NEW   COMPANIES   ACT,    1900  417 

allotment,  though  totally  insufficient  capital  has  been  subscribed. 
English  law,  from  1862  up  till  January  I,  1901,  has  required 
neither  a  minimum  amount  per  each  share  nor  a  minimum 
amount  of  shares  to  be  subscribed  before  the  company  can  pro- 
ceed with  its  business.1 

The  Registrar  of  joint  stock  companies  quotes  a  curious  case 
which  illustrates  the  absolute  absence  of  restraint  in  these 
respects  prior  to  the  present  Act;  in  1891  "The  Ancient  Gold 
Fields  of  Africa,  Limited  "  was  registered  with  a  capital  of 
/,  10,000,  divided  into  9,600,000  shares  of  one  farthing  each  ;  the 
total  subscribed  capital  according  to  the  last  return  was  ifc/., 
i.e.  precisely  one  share  for  each  of  the  original  seven  signatories. 
It  is  obvious  that  a  company  which  starts  on  its  career  with 
too  little  working  capital  is  as  much  foredoomed  to  failure  as  a 
school  without  scholars. 

3.  Overloading  tlic  PitrcJiasc-pricc.  —  The  law  regards  directors 
and  promoters  as  trustees  for  the  shareholders  of  the  property 
of  the  company,  but  the  difficulties  of  securing  disclosures  have 
always  made  evasions  easy,  and  of  these  overloading  the  pur- 
chase-price was  one  of  the  commonest:  in  the  normal  course 
a  promoter  finds  a  flourishing  industrial  concern  worth,  say, 
£10,000,  and  decides  to  float  it  as  a  company  for  as  much  more 
as  he  can  get ;  he  obtains  from  the  proprietors  a  contract  or 
option  to  sell  for  ,£10,000;  he  then  forms  a  small  syndicate 
which  is  registered  as  a  company,  and  purports  to  sell  to  it  the 
contract  or  option  at  an  enhanced  price,  say,  ,£50,000 ;  the  syn- 
dicate next  sells  to  the  person  who  is  to  appear  before  the  public 
as  the  vendor  of  the  business,  again,  of  course,  with  an  advance; 

1  Abroad  limits  are  usually  fixed  in  both  cases.  As  to  the  amount  of  the  share 
this  was  in  France  originally  required  to  be  at  least  100  francs,  but  in  1893  this 
limit  was  reduced  to  25  francs,  so  as  to  encourage  the.  small  investors  ;  in  dermany 
th'.'  lowest  amount  per  share  is  usually  ,£50,  though  /,  10  shares  are  allowed  in 
exceptional  cases  (iSy^  Report,  p.  15).  In  America,  Xew  York  requires  shares  to 
be  not  less  than  live.  <>r  more  than  one  hundred  dollars  (law  of  i  Soo,  Sec.  2,4). 
As  to  amount  of  capita!  subscribed,  in  France,  by  the  lau,'  of  1X9},  the  whole  capi- 
tal must  be  subscribed  and  one-quarter  paid  up,  and  the  same  rule  holds  good  in 
(lermany.  Xew  York  requires  at  least  live  hundred  dollars  with  \\hich  to  begin 
business  (Sec.  4),  and  one-half  of  the  whole  capital  stock  to  be  paid  up  within  a 
year  (Sec.  5).  \e\v  Jersev  requires  a  minimum  of  one  thousand  dollars  with  which 
to  commence  business  (Sec.  S,  iv). 


41 8  TRUSTS,   POOLS  AND   CORPORATIONS 

probably  by  this  time  we  have  got  to  ;£  100,000;  and  lastly,  the 
nominal  vendor  purports  to  make  what  is  called  a  provisional 
contract  with  another  dummy  called  the  trustee  for  the  company, 
subject  to  adoption  by  the  company;  by  this  time  we  are  in  the 
region  of  high  finance,  and  the  price  may  be  anything  up  to 
seven  figures.  The  promoters  thus  keep  piling  up  profits  on 
each  transaction,  and  the  so-called  contract  with  the  syndicate, 
with  the  nominal  vendor,  and  the  provisional  contract  with  the 
trustee  for  the  company  are  obviously  not  real  contracts,  all 
these  persons  being  the  nominees  of  the  promoters. 

4.  The  Prospectus.  —  It  was  generally  felt  that  much  more 
might   be    legitimately    required    of    the    prospectus   than    was 
secured  by  the  old  law ;  that  all  the  material  facts  connected 
with  the  promotion  of  the  company  should  be  stated,  and  the 
directors  forced  to  sign,  so  as  to  pin  them  down  to  legal  liability 
for  all  statements  in  the  prospectus. 

5.  Registration  of  Debentures.  — The  whole  machinery  of  de- 
bentures (i.e.  generally  mortgages  issued  by  the  company  of  all 
its  property)  is  beset  with  difficulty ;  the  common  course  nowa- 
days is  for  the  new-born  company  to  issue  both  shares  and  de- 
bentures together,  and  for  the  vendor  to  take  the  debentures  in 
payment  and  so  keep  his  grip  on   the  neck  of   the  company. 
Take  a  case  mentioned  in  the  last  Board  of  Trade  Report  in 
winding  up,  of  the  Savoy  Press,  Limited,  where  an  undischarged 
bankrupt  formed  a  company  to  purchase  from  himself  a  worth- 
less publishing    business  which    he  had    been   carrying  on  for 
twelve  months  previously;  the  price  was  ,£1500  paid  to  him  in 
cash,   shares   and  debentures;    the   company   ran   for   two   and 
one-half  years,  incurred  debts  up  to  ^76oo  to  ordinary  creditors, 
then  the  vendor  came  in,  ousted  the  company,  and  resumed  pos- 
session by  his  mortgage  as  debenture  holder. 

What  makes  a  company  debenture  such  a  powerful  instru- 
ment is  that  the  law  allows  to  the  company  what  it  does  not  to 
the  private  trader,  viz.,  the  power  to  mortgage  the  whole  under- 
taking as  a  going  concern,  by  what  is  known  as  •&.  floating  charge 
in  the  debenture.  This  does  not  affect  the  property  of  the  com- 
pany so  long  as  the  latter  is  solvent,  and  the  company  can  freely 
deal  with  the  property,  sell,  replace  and  even  mortgage  the 


THE    NEW   COMPANIES   ACT,    1900  419 

stock-in-trade,  and  so  on  ;  but  directly  the  debenture  holder 
proceeds  to  realize  his  security,  the  charge  floats  no  longer,  but 
attaches  with  limpet-like  tenacity  to  all  the  property  the  company 
has  at  the  moment.  The  Courts  have  so  favored  the  floating 
charge  that  they  even  allow  it  now  to  attach  to  uncalled  capital, 
though  this  result  was  not  arrived  at  without  a  struggle,1  and 
Lord  Justice  Romer2  and  others  expressed  strong  opinions  in 
tavor  of  restricting  floating  charges  so  as  not  to  attach  to  un- 
called capital. 

The  Act  of  1862  required  each  company  to  keep  a  register  of 
mortgages,  to  be  open  to  creditors  and  shareholders,  but  not  to 
the  general  public.  This  provision,  however,  has  long  been  a 
dead  letter,  for  the  Courts  held  that  a  mortgage  was  equally 
valid  between  the  parties  whether  registered  in  the  company 
register  or  not. 

Lord  Davey's  Committee  decided  that  in  view  of  the  peculiar 
advantages  enjoyed  by  companies  the  law  demanded  amend- 
ment, and  that  a  public  register  should  be  required,  open  to 
inspection  by  every  one,  to  contain  those  particular  kinds  of 
mortgages  or  charges,  with  regard  to  which  companies  enjoyed 
a  privileged  position. 

6.  Lastly,  there  was  much  discussion  about  the  rights  and 
duties  of  auditors.  Auditors  are  not  valuers,3  and  must  take 
much  information  at  second  hand,  but  the  shareholders  are  en- 
titled to  believe  they  have  some  assurance  that  the  company  is 
sound  if  the  balance  sheet  is  signed  by  a  competent  firm  of 
auditors.  Proposals  were  made  that  balance  sheets  should  be 
filed  annually,  and  be  open  to  public  inspection,  but  this  was 
resisted  in  the  interests  of  both  public  and  private  companies. 


420  TRUSTS,   POOLS  AND   CORPORATIONS 

With  the  one  man  company,  the  new  Act  fails  to  deal 
directly,  while  indirectly  the  Act  considerably  strengthens  its 
position.  Doubts  were  suggested  by  a  learned  judge  in  a  recent 
case,1  whether  the  certificate  of  incorporation  granted  by  the 
Registrar  had  really  created  the  company,  on  the  ground  that 
some  of  the  original  seven  signatures  to  the  memorandum  were 
not  genuine.  Section  I  of  the  new  Act  provides  that  the  Regis- 
trar's certificate  of  incorporation  shall  be  "  conclusive  evidence 
that  all  the  requisitions  of  the  Companies'  Acts  in  respect  of 
registration,  and  of  matters  precedent  and  incidental  tliereto, 
have  been  complied  with,"  so  that  had  Aron  Solomon  forged 
the  other  six  signatures  to  his  memorandum,  his  company  would 
have  been  all  the  same  duly  constituted.2  Nor  does  the  new 
Act  contain  any  clauses  directly  defining  the  powers  and  respon- 
sibilities of  directors  and  promoters,  the  clauses  in  the  draft  bill 
on  the  point  being  erased,3  on  the  ground  that  the  existing  law 
was  probably  sufficiently  stringent  to  meet  all  cases  of  miscon- 
duct.4 Further,  some  really  useful  clauses  defining  the  nature 
of  the  balance  sheet  and  what  it  should  contain  have  also  been 
dropped,  and  there  is  no  doubt  that  the  Act  is  the  weaker  for 
their  omission. 

The  principle  of  the  new  Act  may  be  described  as  "publicity 
rather  than  penalty";  to  give  the  death-blow  not  so  much  to 
the  fraudulent  promoter,  as  to  the  ignorant  shareholder,  in  this 
following  the  conception  of  the  late  Lord  Chief  Justice.5 


1  Mr.  Justice  Kekewich.  in  National  Debenture  Corporation.  1891,  ch.  2,  p.  37. 

-  A  clause  in  the  original  draft  bill  providing  that  where  the  certificate  of  incor- 
poration had  been  obtained  by  fraud,  this  should  be  a  ground  of  winding  up,  was  cut 
out  in  committee. 

;i  The  proposal  was  to  require  of  all  directors  "reasonable  care  and  diligence"  : 
Lord  Justice  Lindley  was  of  opinion  that  these  words  only  reenacted  the  existing 
law,  Lord  Justice  Konier  thought  they  went  beyond  it. 

4  The  law,  however,  is  undoubtedly  defective  in  many  points,  e.g.  a  promoter 
must  make  full  disclosure  to  the  company  of  any  profits  made,  that  is  clear;  but 
what  is  to  happen  if  he  does  not  ?  The  company  can  of  course  have  rescission  of 
the  contract  :  but  if  this  be  impracticable,  the  company  cannot  recover  from  the 
promoters  their  illicit  profit;  seethe  very  recent  case  of  In  re  The  Lady  Forrest 
(Miirchison}  Goldmine,  I.<iu>  Journal,  Feb.  2,  1901,  p.  54. 

•"'  "  When  appeals  are  made  to  the  public  to  subscribe  to  the  capital  of  undertak- 
ing-, e\  entiling  ought  to  be  ubuvehuurd,  no  concealment,  no  secret  prolits." 


THE    NEW   COMPANIES  ACT,    1900  421 

It  is  of  course  obvious  that  the  machinery  of  the  Companies' 
Acts  has  been  adopted  by  many  entirely  private  concerns,  the 
managers  of  which  never  intend  to  appeal  to  the  public,  or  to 
let  any  shares  go  out  of  the  hands  of  the  very  small  circle  of 
holders,  but  who  for  family  or  business  reasons  find  the  prin- 
ciple of  limited  liability  very  convenient.  Such  companies  never 
mean  to  appeal  to  the  public,  and  most  of  the  evils  which  the 
Act  was  intended  to  deal  with,  consequently,  cannot  in  such 
cases  arise,  while  to  impose  hampering  conditions  as  to  publica- 
tion of  amount  of  capital  or  of  the  holdings  of  shares  and  so  on, 
would  only  be  to  handicap  them  in  competition  with  trade  rivals. 
Many  witnesses  l  were  anxious  to  draw  a  hard  and  fast  line 
between  ordinary  public  companies  and  private  or  family  con- 
cerns. The  difficulty  of  definition,  if  nothing  else,  deterred  the 
Committee  from  attempting  such  a  division,  which  does  to  some 
extent  exist  on  the  Continent.  But  while  refusing  to  draw  any 
clear  distinction  directly,  the  Act  does,  in  a  half-hearted  sort  of 
way,  mark  a  difference  between  the  two  classes.  Most  of  the 
new  stringent  provisions  are  to  apply  only  to  companies  "  ivJiich 
issue  ati  ini'itrttioji  to  tJic  public  to  subscribe.'"  These,  in  fact,  are 
the  key-words  of  the  Act,  and  their  definition  and  application 
are  alike  beset  with  difficulties.  Take  the  definition  alone. 
Must  the  invitation  be  a  written  or  printed  document,  for  it 
seems  difficult  to  "issue"  a  verbal  invitation?  And  what  con- 
stitutes an  invitation  to  the  public  ?  Would  an  invitation  to  all 
one's  friends  or  to  all  the  members  of  one's  club  come  within 
the  words  ?  These  are  questions  with  which  the  Courts  may  be 
expected  soon  to  be  occupied,  and  the  difficult}'  of  applying  the 
phrase  will  appear  directly.  Of  the  provisions  of  the  act,  some 
applv  to  all  companies,  whether  incorporated  before  or  since 
January  I,  1901,  and  some  only  to  those  which  are  incorporated 
since  that  date.  To  take  first  the  chief  provisions  applicable: 

A.    To  all  companies. 

r.  fn  order  to  check  the  evils  of  proceeding  to  allotment  with 
insufficient  capital  subscribed,  which  have  already  been  alluded 
to,  the  act  imposes  two  new  restrictions  :  on  every  application 
for  a  share,  the  applicant  must  pay  a  sum  not  less  than  five 


422 

per  cent  of  the  nominal  amount  of  the  share  (Sec.  4  (3));  and 
further,  on  the  occasion  of  the  first  allotment  by  a  company,  the 
act  requires  for  the  first  time  a  definite  amount  of  money  to  be 
paid  into  the  company's  coffers  before  allotment,  viz.  either  the 
whole  amount  of  the  shares  offered  to  the  public ;  or  else,  if  the 
company  has  definitely  fixed  in  its  memorandum  or  articles,  a 
certain  amount  less  than  the  whole  issue  on  which  the  directors 
may  proceed  to  allotment,  then  that  amount.  If  the  amount 
subscribed  does  not  comply  with  one  or  other  of  these  conditions 
then  the  directors  will  be  personally  liable,  after  forty-eight  days, 
to  see  that  the  money  is  repaid  to  the  applicant,  and  any  waiver 
by  the  applicant  of  the  rules  is  expressly  forbidden.1 

Section  4  generally  deals  only  with  share  capital,  and  with 
such  capital  when  "offered  to  the  public  for  subscription."  As 
a  further  precaution,  every  company  limited  by  shares  is  within 
one  month  of  allotment  to  file  a  return  with  the  Registrar  of 
Joint  Stock  Companies,  stating  the  amount  of  shares  allotted, 
and  the  names  and  addresses  of  the  allottees  (Sec.  7):  if  any  of 
the  shares  are  allotted  for  services  rendered,  e.g.  to  a  solicitor  or 
vendor,  and  not  for  cash,  the  contract  under  which  such  shares 
are  allotted,  stating  their  amount  and  the  services  or  considera- 
tion for  which  they  have  been  given,  must  also  be  filed;2  this 
contract  will  then  be  open  to  inspection  by  intending  share- 
holders: this  clause  is  in  substitution  for  a  similar  and  much 
discussed  provision  of  the  Act  of  i867,3  and  is  meant  to  secure 
the  shareholders  full  knowledge  as  to  the  terms  on  which  all 
shares  have  been  allotted.  Curiously  enough  this  Section  7  as 
to  allotment  returns,  applies  to  all  share  companies,  public  or 
private,  and  whether  they  have  issued  an  invitation  to  the  public 
to  subscribe  or  not. 

2.  The  third  and  fourth  evils  to  be  dealt  with  were  over- 
loading the  purchase-price  and  the  prospectus  ;  and  it  is  mainly 
through  alterations  in  the  law  as  to  the  latter  that  full  disclosure 
is  secured  as  to  the  former.  The  prospectus  is  defined  as  any 
"  notice,  circular,  advertisement  or  other  invitation,  offering  to 
the  public  for  subscription  or  purchase  any  shares  or  debentures 
of  a  company," -  — not  a  very  satisfactory  definition:  it  would  be 

1  Section  4,  (3),  (4),  (5).  -  Section  7,  I,  b.  ?-  Suction  25. 


THE   NEW   COMPANIES  ACT,    1900  423 

comparatively  easy  to  frame  a  document  which  would  secure  all 
the  purpose  of  a  prospectus,  i.e.  advertise  the  company  and  the 
fact  that  it  was  doing  business  and  prepared  to  sell  its  shares 
without  definitely  "  offering  "  them  to  "  the  public  for  subscrip- 
tion." But  assuming  a  document  within  that  definition,  then 
Sections  9  and  10  apply  a  great  variety  of  new  rules  to  it :  it  is 
to  be  dated,  signed  by  each  director  and  filed  with  the  Registrar 
(Sec.  9).  The  prospectus  must  further  contain  a  great  many 
features,  which  it  is  impossible  to  set  out  in  anything  like  detail; 
it  must  state  the  contents  of  the  memorandum,  the  number  of 
founder's  shares,  and  of  qualification  shares  for  directors,  the 
minimum  subscription  on  which  the  directors  may  proceed  to 
allotment,  together  with  particulars  as  to  shares  or  debentures 
issued  for  considerations  other  than  money.  Then  come  several 
provisions  to  prevent  overloading  the  purchase-price  :  the  names 
and  addresses  of  all  vendors  of  property  purchased  by  that 
company  must  appear,  together  with  the  amount  payable  in 
cash  or  shares  to  the  vendor,  and  where  there  have  been  a  suc- 
cession of  vendors,  tlicn  tJie  amount  paid  to  cacJi ;  the  amount 
payable  for  good  will  (a  frequent  excuse  for  concealed  fraud)  is 
to  be  set  out  particularly  :  the  sum  paid  as  commission  for  pro- 
curing subscriptions,  for  preliminary  expenses,  and  generally 
anything  paid  to  the  promoter,  must  also  be  clearly  specified, 
and  finally  the  dates  and  parties  to  every  material  contract 
entered  into  during  the  previous  three  years,  not  being  a  con- 
tract made  in  the  ordinary  course  of  business,  must  be  set  out, 
together  with  the  place  where  such  contracts  may  be  inspected. 
In  the  bill  as  originally  drawn  disclosure  was  required  of  "  every 
material  contract  and  every  material  fact,"  but  on  the  energetic 
protest  of  Mr.  Palmer  and  others  in  committee  these  very  wide 
words  were  somewhat  narrowed  and  defined.  \Yith  regard  to 
second  or  subsequent  prospectuses,  if  issued  to  the  outside  pub- 
lic (and  not  to  members  only),  these  provisions  apply  with  modi- 
fications. Where  published  in  a  newspaper,  too,  the  act  takes 
pity  on  the  pockets  of  the  company  and  permits  the  require- 
ments to  be  somewhat  reduced,  e.g.  the  contents  of  the  memo- 
randum may  be  omitted  (Sec.  10,  §  6).  The  act  is  silent  as  to 
the  penalty  if  these  rules  are  disobeyed  :  for  any  one,  e.g.  a 


424  TRUSTS,   POOLS  AND   CORPORATIONS 

director,  wilfully  violating  the  act  in  this  respect,  the  penalty  is 
probably  that  of  a  misdemeanor,  with  two  years'  imprisonment 
under  Section  28;  and  any  purchaser  of  shares,  injured  by  non- 
compliance,  will  have  an  action  for  damages  against  the  person 
liable,  though  he  probably  will  not  be  able  to  secure  rescission 
of  his  contract  with  the  company.1  But  it  is  specially  provided 
that  a  director  can  escape  liability  by  showing  that  he  was  not 
aware  of  the  facts,  which  should  have  been  disclosed  and  were 
not  (Sec.  10,  §  7).  The  act  supplements,  it  does  not  abrogate, 
the  liability  of  the  company  or  directors  under  the  old  law. 
Owing  to  the  definition  of  a  prospectus  the  new  rules  can  only 
apply  to  companies  which  appeal  to  the  public. 

3.  The  fifth  difficulty  mentioned  above  was  the  insufficient 
registration  of  debentures  :  and  Section  14  provides  that,  without 
interfering  with  the  old  register  (though  that,  as  we  saw,  was 
practically  disused),  a  new  register  is  to  be  kept  by  the  Registrar 
of  Joint  Stock  Companies,  open  to  public  inspection  (Sec.  14,  §  8), 
and  a  copy  of  the  new  register  is  also  to  be  kept  at  the  companies' 
offices  :  in  this  register  must  be  inserted  (not  all  mortgages, 
note,  nor  even  all  debentures),  but  (a)  any  mortgage  or  charge  to 
secure  debentures :  this  refers  to  the  usual  covering  deed  to  secure 
debentures,  but  would  probably  also  include  the  registration  of 
debentures  containing  charges  in  themselves  and  unaccompanied 
by  any  covering  deed  :  (b)  a  mortgage  or  cJiargc  on  uncalled 
capital :  the  act  does  not  go  so  far  as  Lord  Justice  Romer  pro. 
posed  and  abolish  such  mortgages  altogether  :  (c)  a  mortgage  or 
cJiargc  created  or  evidenced  by  an  instrument  vjJiicJi  if  executed  by 
an  individual  ivou/d  be  a  bill  of  sale :  it  is  impossible  here  to 
venture  into  the  quagmire  of  the  Bills  of  Sale  Acts,  but  the  gen- 
eral result  of  this  clause  is  that  every  mortgage  or  charge  of 
"  personal  chattels  "  as  defined  by  those  acts  must  be  registered, 
if  the  mortgage  or  charge  is  such  as  to  give  the  mortgagee  or 
chargee  the  power  to  take  possession  of  the  chattels  :  "  personal 
chattels  "  under  the  Bills  of  Sale  Acts  do  not  include  stocks 
and  shares  :  this  subsection  will  not  therefore  compel  mortgages 
by  deposit  of  shares  with  a  bank  to  be  registered  :  (cl)  a  floating 
charge  on  the  isliolc  undertaking  or  property  of  the  company. 

1  Cf.,  for  similar  difficulty,  Companies'  Act,  1837,  Section  38,  now  repealed  by 
Section  33  of  the  1900  Act. 


THE   NEW   COMPANIES  ACT,    1900  425 

The  old  law,  as  we  saw,  rendered  the  old  register  useless  by 
allowing  validity  to  mortgages  though  not  registered  :  the  pres- 
ent act  closes  up  this  hole  of  escape  by  providing  that  in  the 
above  four  cases  the  mortgage  or  charge  unless  registered  within 
twenty-one  days  shall  be  void  as  against  liquidators  and  creditors. 

4.  The  last  difficulty  mentioned  was  the  definition  of  the 
duties  of  the  auditor.  The  provisions  of  the  original  bill  on  the 
subject  have  been  much  cut  down,  at  the  same  time  Sections  21, 
22,  23  are  useful,  and  a  great  improvement  on  the  old  law. 
Every  company,  whether  public  or  private,  whether  appealing 
to  the  world  for  subscriptions  or  not,  must  have  an  auditor,  prop- 
erly remunerated  :  if  an  auditor  is  not  appointed  at  the  annual 
general  meeting  the  Board  of  Trade  may  themselves  appoint 
(Sec.  21):  when  appointed  the  auditors  are  to  have  full  right  of 
access  to  the  company's  books  and  the  right  to  demand  all  neces- 
sary information  ;  they  are  to  sign  the  balance  sheet  and  to  add 
a  certificate  definitely  stating  whether  their  requirements  as 
auditors  have  been  complied  with,  and  also  whether  in  their  view 
the  balance  sheet  exhibits  a  true  and  correct  view  of  the  state  of 
the  company's  affairs.  It  is  curious  to  note  that  the  act  does 
not  in  terms  say  there  is  to  be  a  balance  sheet,  only  that  the 
auditor  is  to  sign  it,  presumably  if  there  is  one  :  it  is  very  doubt- 
ful if  the  Courts  will  treat  this  as  impliedly  requiring  a  balance 
sheet  in  every  case. 

B.  i.  With  regard  to  regulations  applicable  only  to  compa- 
nies incorporated  since  January  I,  1901,  there  are  new  rules  laid 
down  as  to  directors'  qualification  shares  ;  the  act  does  not  insist 
on  such  a  qualification,  but  says  that,  where  the  articles  of  the 
company  require  it,  in  order  to  avoid  difficulties  which  arose, 
under  the  existing  law,  either  the  director  must  sign  the  memo- 
randum for  the  amount  of  these  shares  or  (if  not  an  original 
director)  sign  and  file  with  the  Registrar  a  definite  contract  to 
take  the  proper  number  of  shares  from  the  company  and  pay  for 
them  (Sec.  2,  ii);  the  section  does  not  say  explicitly  with  whom 
the  contract  is  to  be  entered  into,  whether  with  the  company  or 
not.  In  any  case  these  requirements  are  only  necessary  in  the 
case  of  companies  which  "  issue  an  invitation  to  the  public  to 
subscribe,"  a  phrase  which  again  causes  difficulty.  What  is  to 


426  TRUSTS,   POOLS   AND   CORPORATIONS 

happen  if  a  company,  established  on  a  private  basis,  and  so 
managed  for  two  years,  then  requires  more  capital  and  appeals 
to  the  public  ?  Will  the  original  appointment  of  directors 
become  void  because  these  rules  were  not  observed  ?  The  act 
gives  no  answer  to  the  question  though  the  Courts  will  probably 
soon  be  called  on  to  do  so. 

2.  As  already  mentioned,  the  idea  of  a  double  registration 
(preliminary  and  final),  of  a  company,  common  on  the  Continent, 
has    not   met   with  favor  here,  and    Lord  Davey's  Committee 
reported  against  it.     At  the  same  time  the  act  indirectly  does 
adopt  something  of  the  sort  by  enacting  in  Section  6,  that  no 
company  shall  in  future    "  commence  business "    until   certain 
things  have  been  done.     This  requirement  will  in  no  way  affect 
the  registration,  but,  unless  and  until  the  requirements  of  the 
section  are  complied  with,  the  company  though  registered  and 
in  existence  will  be  in  suspense  ;  it  cannot  make  binding  con- 
tracts nor  borrow  money.      The  preliminaries  which    must  be 
complied  with  before  business  may  be  commenced  are  :  (i)  .the 
proper  amount  of  shares  must  have  been  allotted  (i.e.  either  the 
whole  amount  offered  or  the  proportion  required  by  the  articles, 
Sec.  4);  (ii)  the  directors  must  have  paid  a  required  proportion 
of  their  qualification  shares;  and  (iii)  the  secretary  must  have 
filed  a  statutory  declaration  that  these  rules  have  been  complied 
with.     The  Registrar  will  then  issue  a  certificate  allowing  the 
company  to  commence  its  business.     This  section  again   only 
applies  to  companies  which  "issue  an  invitation  to  the  public  to 
subscribe."     A  private  company  need  not  get  the  certificate  to 
commence  ;  but  how  are  people,  who  wish  to  contract  with   a 
company,  to  know  whether  it  is  within  the  terms  of  this  section 
or  not?     Whether  it  has  appealed  to  the  public  or  not?     The 
point  is  important,  for  if  it  is  a  private  company  which  has  not 
gone  to  the  public,  then  any  person  contracting  with  the  com- 
pany will  be  safe  and  the  company  will  be  bound,  but  otherwise,  if 
the  company  has  appealed  to  the  public  and  not  got  the  Regis- 
trar's certificate  the  company  will  not  be  bound  by  the  contract. 

3.  Though    these   many  restrictions    are    imposed    on    those 
companies  which  appeal    to  the  public    to  subscribe,   they  are 
allowed  one  compensating  privilege,  vi/..  that  in  their  case  under- 


THE    NEW   COMPANIES   ACT,    1900  427 

writing-  is  in  future  to  be  legal,  and  the  long  recognized  custom 
of  the  City  at  length  receives  the  sanction  of  the  Legislature, 
but  only  on  these  express  terms,  viz.  that  the  payment  of  the 
commission  and  the  amount  of  rate  per  cent  are  authorized  by 
the  articles  and  disclosed  by  the  prospectus1  (Section  8). 

Finally  comes  the  question  :  Will  the  act  achieve  its  purpose 
and  check  fraud  ?  That  it  will  provide  work  for  the  courts  for 
years  to  come  is  clear.  The  drafting  is  not  good  and  the  diffi- 
culties of  interpretation,  some  of  which  have  been  pointed  out, 
are  numerous.  But  criticisms  of  the  act  go  deeper  than  that: 
the  provisions  as  to  the  register  of  mortgages,  the  prospectus 
and  the  duties  of  auditors  are  all  useful  and  should  give  some 
protection  to  the  public,  but  as  it  is  proverbially  easy  to  drive 
a  coach  and  four  through  Acts  of  Parliament,  it  should  be  easy 
to  drive  one  through  or  at  any  rate  round  some  of  the  chief  pro- 
visions of  this  act :  there  is  more  than  one  way  of  circumvent- 
ing the  "  commencement  of  business  "  provision,  of  which  much 
is  clearly  expected  ;  for  instance,  the  company  may  in  its  articles 
mention  some  merely  trifling  sum  on  which  to  proceed  to  allot- 
ment, or  if  the  promoters  shirk  the  publicity  of  this  course,  they 
can  simply  start  in  a  very  small  way,  with  seven  members,  all 
directors,  a  small  capital  of  perhaps  ,£100,  issue  this  all  nomi- 
nally to  the  public,  and  so  secure  the  Registrar's  certificate  ; 
the}'  could  then  at  once  launch  out,  increase  their  capital,  say 
to  ,£500,000  and  proceed  as  at  present. 

Again,  all  the  restrictions  on  companies  which  issue  an  invi- 
tation to  the  public  can  at  one  stroke  be  rendered  futile  :  many 
companies  domiciled  near  the  Stock  Exchange  never  appeal 
directly  to  the  public  at  all  ;  they  are  "baby  creations,"  owing 
their  birth  to  strong  promoting  parents,  their  shares  are  dealt  in 
more  or  less  artificially  by  the  parent  company,  public  quotations 
of  the  shares  appear,  and  eventually  the  public  rush  in  and  buy  : 
the  effect  of  these  clauses  will  probably  be  largely  to  encourage 
this  underground  process. 

In  a  word,  considering  all  the  time  spent  upon  it  it  is  a  pity 
that  the  act  achieves  so  little. 

.rr.   RVKT.OW. 


XVIII 

TRUST    LITERATURE:    A   SURVEY   AND 
CRITICISM1 

THE  industrial  changes  in  the  United  States  during  the  last 
two  or  three  years  have  called  forth  inevitably  a  multi- 
tude of  writings  dealing  with  the  problem  of  trusts,2  just  as,  in  the 
earlier  years  of  the  present  decade,  the  condition  of  our  national 
finances  stimulated  the  discussion  of  the  tariff  or  the  silver  ques- 
tion. It  is  the  purpose  of  this  article  to  present  a  brief  survey  of 
the  recent  output  of  trust  literature,  and  then  to  attempt  a  critical 
estimate  of  the  views  advanced  concerning  the  most  important 
theoretical  problems  involved  in  the  study  of  industrial  consoli- 
dation. 

I 

In  mere  volume,  at  least,  the  product  of  the  last  few  years  is 
noteworthy.  Discussion  of  the  monopoly  question  in  the  United 
States  seems  to  have  begun  early  in  the  seventies,  when  popular 
dissatisfaction  arose  concerning  railroad  rates  and  management. 
Then,  for  a  time,  an  occasional  article  in  some  periodical  indi- 
cated only  a  fitful  interest  in  the  subject,  until  early  in  the  eigh- 
ties the  formation  of  the  Diamond  Match  Company  and  the 
Standard  Oil  Trust  caused  a  livelier  discussion  of  the  problem  of 
monopoly.  Later  in  the  same  decade  the  appearance  of  other 
combinations,  as  well  as  a  growing  interest  in  railroads  and 
municipal  monopolies,  caused  a  marked  increase  of  writings 
dealing  with  this  subject.  An  incomplete  bibliographical  sum- 
mary shows  that  fifteen  treatises  or  reports  of  official  investiga- 

1  From  the  Quarterly  Journal  of  Economics,  Vol.  XV,  1901,  pp.  167-216. 

2  By  "trusts"  the  writer  means  those  great  combinations  of  capital  in  our  manu- 
facturing  industries  which   are   commonly  called  by  this  name.     It  is  not  the  pur- 
pose of  this  paper  to   deal   with   the  literature  devoted  primarily   to   the  problems 
presented  by  the  so-called  natural  monopolies. 

428 


TRUST    LITERATURE:    SURVEY   AND   CRITICISM      429 

tions  and  over  thirty-five  noticeable  articles  in  the  chief  periodicals 
appeared  between  1887  and  1890.  For  the  next  six  years  the 
output  diminished,  probably  for  the  reason  that  the  tariff  and  the 
money  questions  were  uppermost  in  the  public  mind  ; 1  and  only 
eight  books  or  reports  and  hardly  more  than  a  score  of  articles 
were  published  during  the  period.  In  1897  and  1898  at  least 
six  books  or  pamphlets  and  about  thirty  articles  appeared,  fore- 
shadowing an  increased  interest  in  the  problem  of  monopoly. 
And,  finally,  the  last  two  years  have  given  us  not  less  than 
twenty-eight  books,  reports,  and  pamphlets,  together  with  a  flood 
of  periodical  articles  that  will  reach  probably  one  hundred  and 
fifty  titles  when  the  returns  for  1900  have  all  been  received. 
While  these  figures  can  claim  only  substantial  accuracy,  they 
will  suffice  to  show  that  the  production  of  trust  literature  has 
kept  pace  with  the  process  of  industrial  consolidation. 

Any  bibliography  of  these  writings,  like  lists  of  recently 
formed  trusts,  becomes  antiquated  before  it  leaves  the  press,  so 
rapid  is  the  rate  of  increase.  The  only  serious  attempt  in  this 
direction  is  Mr.  A.  P.  C.  Griffin's  List  of  Books  relating  to 
Trusts,2  which  appeared  early  last  summer.  This  is  of  consid- 
erable value  to  the  student,  but  professes  to  give  "  only  the  chief 
authorities."  The  list  of  books  and  pamphlets  is  nearly  com- 
plete, but  the  reader  is  surprised  to  notice  that  the  bibliography 
refers  to  Nicholson's  short  chapter  on  monopoly  value,  and  does 
not  include  the  valuable  discussion  of  combinations  of  capital, 
contained  in  Lladley's  Economics;  while  in  the  references  to 
periodical  literature  he  will  often  wonder  what  principles  of 
selection  could  have  been  followed. 

1  That  tlu'  small  amount  of  trust  literature  thnl  appeared  between  1890  and  1896 

red  from  the   fact  that  in 


shows  that  no  books,  and  only  a  few  articles,  appeared.      I ) 


ton.    1900.      l\    second    edition    with    additii 


ns   app 


aphy  uf  earlier  works,  see   von 


Halle,  Trusts,   jjS-J5O    v.\e\v   York, 


430  TRUSTS,   POOLS  AND   CORPORATIONS 

Since  the  present  article  must  be  confined  to  recent  literature, 
it  has  seemed  best  to  draw  a  line  somewhat  arbitrarily  at  the 
year  1897,  and  to  exclude  from  consideration  most  of  the  writ- 
ings that  appeared  before  that  date.  Within  these  limits  the 
author  will  aim  to  give  detailed  references  to  the  books,  reports 
and  pamphlets  that  have  come  to  his  attention  up  to  the  time  of 
writing.  In  some  cases,  however,  it  will  be  necessary  to  refer 
to  works  that  appeared  earlier  than  1897.  With  periodical  lit- 
erature no  extended  bibliography  is  necessary  in  these  days,  when 
Poole's  Index  is  available  for  every  reader,  so  that  the  citations 
here  given  will  be  confined  to  the  most  valuable  articles,  and  to 
some  others  that  are  significant  as  representing  certain  shades 
of  opinion. 

Passing  over  certain  discussions  of  the  monopoly  problem  that 
have  appeared  in  some  recent  economic  treatises  and  general 
works  of  reference,1  which,  by  the  way,  may  be  recommended 
to  those  who  are  beginning  the  study  of  this  subject,  we  may 
divide  recent  trust  literature  into  eight  classes.  It  is  true  that 
any  such  procedure  will  be  open  to  the  charge  of  arbitrariness 
at  some  points;  but,  on  the  other  hand,  it  will  avoid  so  much 
repetition  and  bring  opposing  theories  into  such  clear  relief 
that  it  may  be  trusted  to  commend  itself  to  the  reader. 

(i)  The  first  of  our  eight  classes  comprises  the  reports  of  offi- 
cial investigations2  and  the  proceedings  of  conferences  called 

1  YV.  P.  D.  Bliss,  Encyclopaedia  of  Social  Reform,  888-894,  !346-i348  (New 
York,  1898)  ;  R.  II.  I.  Palgrave,  Dictionary  of  Political  Economy,  II,  802-807  (Lon- 
don, 1896);  C.  J.  Bullock,  Introduction  to  the  Study  of  Economics,  309-335  (2d 
edition,  Xew  York  and  Boston,  1900);  A.  T.  Hadley,  Economics,  151-173  (New 
York,  1896). 

-  Report  and  Proceedings  of  the  Joint  Committee  of  the  Senate  and  Assembly 
appointed  to  investigate  Trusts,  Senate  Document  60  (Albany  and  New  York,  1897); 
Industrial  Commission,  Preliminary  Report  on  Trusts  (Washington,  1900);  Same, 
Trusts  and  Industrial  Combinations,  —  Statutes,  Decisions  and  Digest  of  Corporation 
Laws  ;  Bulletin  of  the  Department  of  Labor,  No.  29,  pp.  661-831,  Trusts  and 
Industrial  Combinations  (Washington,  1900). 

The  entire  report  of  the  United  States  Industrial  Commission  has  since  ap- 
peared. Vols.  I  and  XIII  are  specifically  devoted  to  testimony:  Vol.  II 
contains  a  digest  of  statutes  and  decisions  ;  Vol.  XVIII  is  devoted  to  industrial 
combinations  in  Europe:  Vol.  XIX.  pp.  594-685.  contains  the  final  report  of 
the  commission,  with  an  appended  opinion  by  counsel  as  to  legislation.  The 
Appendix  to  Vol.  XIX.  pp.  1120-1128.  gives  statistics  supplementing  those  in 


TRUST   LITERATURE:    SURVEY   AND    CRITICISM      431 

under  the  auspices  of  various  organizations.1  The  New  York 
investigation  of  1897  was  mainly  a  shrewd  political  move,  in- 
tended to  prove  the  undying  hostility  of  the  Republican  party  to 
trusts ;  but  it  brought  out  some  interesting  information.  The 
trust  magnates  summoned  to  testify  before  the  legislative  com- 
mittee suffered  from  those  attacks  of  loss  of  memory  with  which 
they  are  usually  afflicted  upon  such  occasions ;  but  Mr.  Theodore 
Havemeyer  volunteered  the  statement  that  he  would  not  care  to 
engage  in  a  business  enterprise  that  did  not  promise  a  profit  of 
15  or  20  per  cent.  The  Industrial  Commission  was  more  suc- 
cessful than  any  previous  body  of  investigators  in  securing  testi- 
mony from  persons  interested  in  trusts,  and  its  Report  contains 
a  careful  digest  of  evidence  that  adds  greatly  to  its  usefulness. 
The  Standard  Oil  combination  seems  to  have  made  a  most  care- 
ful and  systematic  endeavor  to  clear  itself  from  the  many  dam- 
aging charges  that  have  been  brought  against  its  methods  ; 2  and, 
if  the  public  still  remains  unconvinced  of  the  spotless  purity  of 
this  organization,  it  will  not  be  due  to  any  lack  of  sweeping 
denial  and  stout  asseveration  in  the  testimony  of  the  oil  mag- 
nates. The  most  valuable  feature  of  this  Report  is  the  investi- 
gation, conducted  under  the  direction  of  Professor  Jenks,  into 
the  effect  of  combinations  upon  prices.  This  gives  us  the  best 
available  data  for  a  trustworthy  conclusion  upon  a  most  funda- 
mental question.  Nearly  as  much  can  be  said  of  the  Digest  of 
Corporation  Laws  contained  in  the  second  volume  of  the 
Commission's  Report.  The  conclusions  and  recommendations 

Vol.  XIII.     On  the  general  \vorkofthe  commission,  cf.  Quarterly  Journal  of 

Rnuioniics.  XVI.  pp.  564-586. 

The  Twelfth  United  States  Census.  Manufactures.  Part  I.  pp.  Ixxv-lxxxi, 
specially  reports  statistics,  which  are  supplemented  by  Pubs.  Amer.  Statistical 
Association.  X.  S.,  Xo.  53.  for  March.  lyoi.  pp.  1-20.  —  ED. 

1  The  <  hu ago  ('oiiference  on  Trusts  M  'hicag' >,  K)OO^  ;  Official  Report  of  the  Xa- 
tional  Ami- l"ru>t  <  'onfcrence  ((.'hieago,  looo);  ( 'orp»  rat  ions  anil  Public  Welfare, 
Addresses  at  the  Annual  Meeting  of  the  American  Academy  of  Political  and  Social 
Science  (  New  Y"fk,  KIOO"). 

-  This  testimony  of  the  oil  magnates  has  been  gathered  together  into  a  single  vol- 
um".  An  In-ide  View  of  Trusts  (\cw  York,  1809),  which  has  been  distributed  broad- 
cast, proliaMy  for  "educational  purposes.'' 

A  carefully  edited  and  annotated  edition  of  this  testimony  has  recently  been 
issued  bv  the  Oil  L'itv  Dem  k.  —  Ki>. 


432  TRUSTS,   POOLS  AND   CORPORATIONS 

advanced  by  the  Commission  will  never  be  charged  with  radical- 
ism, and  are  marked  by  extreme  sensitiveness  concerning  the 
relation  of  trusts  to  the  protective  tariff.  The  Bulletin  of  the 
Department  of  Labor  contains  further  data  concerning  the  effect 
of  trusts  upon  prices,  and  publishes  the  results  of  an  independent 
investigation  into  the  working  of  these  combinations.  This 
investigation  was  conducted  by  sending  out  schedules  of  ques- 
tions to  forty-one  organizations;  and  the  Bulletin  presents  the 
results  in  tabular  form,  whenever  that  is  possible.  The  informa- 
tion thus  gathered  is  of  no  little  interest ;  but  it  must  be  accepted 
with  certain  reservations,  since  it  was  not  to  be  expected  that  the 
companies  answering  the  inquiries  would  give  testimony  adverse 
to  their  own  interests.  This  would  probably  be  conceded  readily 
by  Professor  Jenks,  who  had  charge  of  the  investigation. 

The  proceedings  of  the  Trust  Conference,  held  under  the 
auspices  of  the  Civic  Federation  of  Chicago,  attracted  such  gen- 
eral attention  1  at  the  time  that  little  space  need  be  devoted  to 
them  in  this  review.  It  will  suffice  to  say  that,  while  only  a 
few  of  the  papers  and  addresses  at  the  conference  possess  any 
considerable  value  in  themselves,  the  proceedings  as  a  whole 
should  be  read  by  every  student  who  desires  to  form  an  estimate 
of  the  present  condition  of  popular  opinion  upon  trusts.  All 
sorts  and  conditions  of  men  were  present  at  the  conference, 
and  their  opinions  may  be  taken  as  fairly  representative  of  the 
classes  for  which  they  spoke.  The  Report  of  the  National 
Anti-Trust  Conference  has  a  similar  interest,  as  an  expression 
of  the  sentiments  of  a  very  large  class  of  persons  who  see  little 
or  nothing  that  is  good  in  the  process  of  industrial  consolida- 
tion. Some  of  the  addresses  contained  in  the  volume  are  of 
decided  value  in  calling  attention  to  the  undoubted  abuses  and 
dangers  that  attend  the  movement.  Corporations  and  Public 
Welfare  is  devoted  largely  to  discussions  of  railroads  and  other 
public  service  companies,  but  contains  articles  upon  industrial 
securities  as  investments  and  the  influence  of  corporations  upon 
political  life. 

1  See  Harper's  Weekly,  XI. Til,  954,  975;  Outlook,  LXIII,  199;  Independent,  LI, 
2602;  A'ei'iew  of  Reviews,  XX,  457;  Journal  of  Political  Economy,  VIII,  I;  Annals, 
(>f  iii?  .lineman  Academy,  XV,  69. 


TRUST    LITERATURE:    SURVEY   AND   CRITICISM      433 

(2)  In  our  second  class  may  be  placed  those  writings  in  which 
the  trust  movement  is  accepted  as  inevitable,  and  its  causes, 
advantages,  dangers  and  proper  regulation  are  discussed.  No 
less  than  five  recent  books  belong  to  this  group.1  Harper's 
Restraint  of  Trade  is  a  mere  collection  of  extracts  from  vari- 
ous works  upon  trusts  ;  but  the  compiler's  opinion  is,  evidently 
enough,  that  "  modern  industrial  conditions  have  demanded " 
that  the  "  principle  of  combination  be  generally  accepted."  The 
books  of  Baker,  Collier,  von  Halle,  and  Jenks  agree  in  finding 
the  cause  of  trusts  in  the  conditions  of  modern  competition  and 
the  economies  that  arise  from  the  combination  of  capital.  These 
writers  hold  that  the  trusts  represent  a  distinct  economic  gain 
in  productive  power,  but  recognize  that  these  organizations 
have  been  attended  with  many  abuses.  Professor  Jenks  and 
Mr.  Collier  advocate  no  radical  action  to  restrain  the  evils  of 
trusts,  but  propose  various  moderate  remedies,  of  which  the 
chief  is  always  publicity.  Mr.  Baker,  however,  believes  that 
no  efficient  method  of  regulation  can  be  found  short  of  placing 
a  representative  of  the  government  upon  the  board  of  directors 
of  every  combination.  The  main  contention  of  these  works  — 
that  trusts  are  a  natural  and  inevitable  outcome  of  modern  con- 
ditions—  we  shall  reserve  for  more  extended  discussion,  in  sub- 
sequent pages.2 

A  decided  majority  of  the  articles  that  have  appeared  recently 
in  the  periodicals,  popular  or  scientific,  should  be  included  in 
this  class.3  President  Hadley  and  Professor  Kin  ley  argue  that 

1  C.  W.  linker.  Monopolies  and  the  People  (2cl  edition,  New  York  and  London, 
iSoo^;  W.  M.  C 'Ilier,  The  Trusts  (\e\v  York,  1900);  E.  L.  von  Halle,  Trusts,  or 
Industrial  ( 'ombinations  in  the  United  States  (Neu-  York,  1895);  ^-  H.  Harper, 
Restraint  ot"  Trade  (Chicago,  1900);  [.  \V.  Jenks,  The  Trust  Problem  (New  York, 

I  MOO). 

-  With  these  honks  sh  mid  1>e  mentioned  the  chapter  on  trusts  contained  in  Pro- 
fess 'ir  ( ii  I  ini^'s  Demo. -racy  and  Kmpire,  137-14:;  (  \e\v  York,  1900 }.  The  author 
holds  thu  the  trust  "coull  never  have  beo'ine  th ..-  gr  at  factor  in  the  commercial 
world  ih  it  it  is  to-day"  unless  it  had  been  ''an  efficient  device  for  dealing  with 
existing  industrial  conditions." 

:i  See  articles  by  lladlev,  in  .SV/V/W.'-'.f  .l/,!^,!:hit',  X\YI,  604;  Kinlev.  in  Progress, 
Y,  7:  Sherwood,  in  JWt'  AVr7<7c',  \  111,  V'-i  '  o'u  man.  in  Journal  of  Political  Kcon- 
i'wr,  YIII,  lo;  Robinson,  in  Cc>tSi>'iliiti~'f  AVrvV.v.  I\  .  ;};  [;  nks,  in  ( nt  /r.V;Yr  four- 
Hal  <>_/'  J;i'i'i!c»ii(i,  XV,  4(1;  Smith,  in  (/itii/tttu /iiiin,  XXIX,  347;  Ashley,  Surveys, 


434  TRUSTS,   POOLS  AND   CORPORATIONS 

trusts  are  due  to  destructive  competition  and  the  superior 
economy  of  concentrated  production ;  Professor  Sherwood  be- 
lieves that  these  organizations  are  the  agency  through  which 
the  most  skilful  management  is  secured ;  Mr.  Coleman  and  Mr. 
Robinson  look  upon  such  combinations  as  an  inevitable  product 
of  industrial  evolution;  and  Professor  Jenks  again  presents  the 
views  advanced  in  The  Trust  Problem.  In  these  articles  the 
reader  will  find  little  that  is  new. 

(3)  Radically  different  views  are  advanced  in  works  of  a  third 
class.1  M.  de  Rousiers  is  too  faithful  to  the  tenets  of  the  ortho- 
dox French  school  to  abandon  his  belief  in  the  efficacy  of  the 
competitive  system.  His  interesting  work  contains  the  results 
of  an  investigation  into  the  leading  industries  that  have  fallen 
into  the  hands  of  trusts.  He  finds  almost  everywhere  a  ten- 
dency towards  production  on  a  large  scale,  but  thinks  that  this 
is  not  the  cause  of  monopoly.  The  real  cause,  he  contends,  is 
control  over  limited  supplies  of  raw  material  and  facilities  for 
transportation,  or  the  special  advantages  conferred  by  tariff  and 
patent  laws.  His  remedy  for  the  evils  caused  by  trusts  is  to 
abolish  all  restrictions,  and  thus  to  leave  competition  free  to  do 
its  perfect  work.  Professor  Ely's  recent  book  is  a  treatise  on 
the  subject  of  monopoly;  and  begins  with  a  study  of  definitions, 
a  classification  of  monopolies  and  a  formulation  of  the  law  of 
monopoly  price.  It  then  proceeds  to  discuss  the  subjects  of 
industrial  consolidation,  the  limits  of  monopoly  and  the  perma- 
nence of  competition.  While  the  author  holds  that  competition 
is  impossible  in  the  field  of  the  "  natural  monopolies,"  he  believes 
that  elsewhere  the  tendency  towards  consolidation  is  limited  by 
virtue  of  the  fact  that,  beyond  a  certain  point,  combination  of 
capital  is  not  economical.  Our  present  trusts  he  believes  to  be 

Historic  and  Economic,  378-391  (London,  1900).  Sec  also  article  by  Carnegie  in 
Century  Magazine,  LX,  145. 

1  P.  de  Rousiers,  Lcs  industries  monopolisees  aux  Ktats-Unis  (Paris,  1898);  R.  T. 
Ely,  Monopolies  and  Trusts  (New  York  and  London,  1900);  A.  I}.  Xettleton,  Trusts 
or  Competition  (Chicago,  1900);  II.  Wallace,  Trusts,  and  how  to  deal  with  them 
(Des  Moines,  1899). 

Other  secondary  treatises,  based  mainly  on  American  experience,  are  Le  Ros- 
signol.  Monopolies  Past  and  Present.  1901  :  and  St.  Leon.  Cartells  et  Trusts. 
Paris.  1903  :  besides  a  number  of  (ierman  treatises.  —  En. 


TRUST   LITERATURE:   SURVEY   AND   CRITICISM      435 

the  result  of  special  privileges  and  corporate  abuses,  —  a  con- 
clusion which  is  very  much  like  that  reached  by  M.  de  Rousiers. 
Mr.  Nettleton's  book  is  to  a  great  extent  a  compilation  of  facts 
and  opinions,  but  in  the  second  chapter  the  author  presents  his 
own  conclusions  in  a  vigorous  argument  against  the  trust.  He 
believes  that  the  economies  of  consolidation  cease  before  the 
point  of  monopoly  is  reached,  and  that  existing  combinations 
are  the  "result  of  monopoly  hunger"  and  the  product  of  rail- 
road discriminations  and  other  unfair  privileges.  For  a  remedy 
he  advocates  rigorous  legal  prohibitions,  supplemented  by  a 
reform  of  existing  abuses.  Mr.  Henry  Wallace  concedes  that 
the  disorders  sometimes  attending  modern  competition  not  un- 
naturally lead  producers  to  take  refuge  in  combination.  He 
believes,  however,  that  the  trust  is  a  vicious  method  of  remedy- 
ing the  evils  which  competition  sometimes  produces,  and  that 
the  consolidations  of  recent  years  have  caused  a  speculative 
"boom  "  which  is  sure  to  be  followed  by  a  disastrous  reaction. 

To  Professor  J.  B.  Clark  we  owe  a  series  of  papers 1  in 
which  the  contention  is  made  that,  while  large  scale  production 
is  economical  and  giant  industrial  undertakings  are  to  be  the 
order  of  the  day,  competition  is  certain  to  continue,  neverthe- 
less. Professor  Clark  believes  that  monopoly  is  almost  wholly 
bad,  and  that  the  most  efficient  management  is  found  in  inde- 
pendent establishments,  not  in  monopolistic  concerns  that  are 
removed  from  the  stimulus  of  competition.  His  remedy  for 
evils  that  attend  the  present  trust  movement  is  to  take  away 
from  the  combinations  their  favorite  weapons,  —  price  discrimi- 
nations, factors'  agreements  and  other  questionable  devices,  — 
so  that  competition  can  operate  without  let  or  hindrance.  With 
this  accomplished,  he  believes  that  industrial  consolidation  can 
proceed  to  any  extent  that  may  be  deemed  advantageous,  with- 
out producing  the  evil  results  inseparably  connected  with 
monopoly. 

If  a  digression  is  permissible  at  this  point,  we  may  suggest 
that  Ely's   Monopolies  and  Trusts  and  Jenks's  Trust  Problem 


436  TRUSTS,   POOLS  AND   CORPORATIONS 

are  the  works  that  will  be  found  most  useful  for  the  general 
reader.1  Both  of  these  books  are  thoroughly  readable,  and 
they  will  be  found  to  supplement  each  other  in  a  most  help- 
ful manner.  Ely  discusses  the  definition  and  classification  of 
monopolies ;  while  Jenks  explains  the  methods  by  which  trusts 
are  promoted,  financed  and  floated.  The  one  writer  formulates 
the  law  of  monopoly  price ;  and  the  other  furnishes  statistics 
showing  precisely  what  influence  combinations  have  exerted 
upon  prices.  The  first  book  presents  the  arguments  of  those 
who  believe  that  the  monopolistic  features  of  trusts  are  due  to 
special  privileges  and  unlawful  practices ;  the  second  contends 
that  these  industrial  combinations  have  developed  naturally  out 
of  the  conditions  of  modern  competition.  Monopolies  and 
Trusts  advocates  remedies  that  are  designed  to  restore  compe- 
tition to  its  former  position  as  the  fundamental  economic  force ; 
The  Trust  Problem  accepts  the  principle  of  combination,  and 
proposes  conservative  methods  of  regulating  monopolistic  enter- 
prises. From  the  study  of  the  two  books  the  reader  can  gain 
a  competent  knowledge  of  the  chief  subjects  that  now  interest 
students  of  this  important  question. 

(4)  In  a  fourth  group  we  may  place  a  number  of  articles 
which  relate  to  various  phases  of  the  trust  movement.  Upon 
the  financial  aspects  of  consolidation  three  references  may  be 
commended  to  the  reader.2  Mr.  Charles  S.  Fairchild  has  dis- 
cussed, from  the  point  of  view  of  the  practical  banker,  the 
financing  of  trusts.  Mr.  James  B.  Dill  has  called  attention  to 
the  dangers  that  have  attended  the  manufacture  of  industrial 
securities,  often  falsely  so-called,  and  has  insisted  that  the  only 
safety  for  the  trusts  can  be  found  in  the  complete  abandonment 

1  A  new  edition  of  Je'nks  with  additions  appeared  in  1902.  E.  S.  Meade,  Trust 
Finance,  is  by  far  the  most  comprehensive  and  convenient  treatise  in  the  special 
field  indicated  by  its  title.  ('..  II.  Montague,  Trusts  of  To-day,  1904,  is  a  readable 
and  convenient  manual  of  the  general  subject.  Moody,  Truth  about  the  Trusts,  1904, 
is  a  convenient  compilation  of  data  frmi  his  annual  Manual  of  Corporations. —  En. 

-  See  Fairchild  and  Dill,  in  Publications  of  the  American  Economic  Association, 
Third  Series,  I,  149  and  177  ;  I>ill,  in  Corporations  and  Public  Welfare,  107;  Dill, 
The  College  Man  and  the  Corporate  Proposition,  privately  printed  (New  York, 
1900)  ;  and  Meade,  in  Annuls  of  the  American  Academy  of  Political  Science,  X\  I, 
34 v  [More  completely  in  his  Trust  Finance.  —  Ei>.] 


TRUST   LITERATURE:    SURVEY   AND   CRITICISM      437 

of  speculative  management ;  while  Dr.  E.  S.  Meade  has  written 
a  most  valuable  survey  of  the  financial  aspects  of  the  trust 
problem. 

Comparatively  little  work  has  been  done  in  recent  years  upon 
the  history  of  individual  trusts,  probably  because  the  consolida- 
tion movement  has  been  so  well-nigh  universal  as  to  draw  atten- 
tion away  from  the  fortunes  of  particular  enterprises.  Yet 
special  articles  have  been  devoted  to  the  wire  nail  association  of 
1895,  the  tin-plate  combination  and  some  others;1  while  the 
testimony  taken  by  the  Industrial  Commission  contains  a  large 
amount  of  material  for  the  history  of  recent  industrial  changes. 
Finally,  the  phenomenal  activity  of  trust  promoters  in  1898  and 
the  earlier  part  of  1899  has  been  well  described  by  Mr.  Byron 
Holt.2 

(5)  A  fifth  class  comprises  those  writings  which  relate  pri- 
marily to  the  special  favors  and  other  abuses  by  which,  un- 
doubtedly, trusts  have  profited  to  a  considerable  extent.  Most 
prominent  among  such  evils  has  been  discrimination  in  railway 
rates.  Mr.  Lloyd's  Wealth  against  Commonwealth  did  good 
service  in  showing  the  potency  of  the  "  smokeless  rebate"  as  a 
weapon  for  destroying  competition,  and  few  recent  writers  have 
failed  to  say  something  on  this  subject.3  Of  late  the  tendency 
has  been  to  give  too  little  weight  to  this  factor  in  the  trust 
problem  ;  and  it  is  well  for  us  to  be  reminded  by  Mr.  Aldace 

1  See  F.dgerton,  in  Political  Science  Quarterly,  XII,  246  ;  McYey,  in  Yale  Re-'ie~i<, 
VIII,  156;  also  Harper's  U'ee!;ly,  XLII,  202;  Independent.  XLIX,  273.  [The 
I'nited  States  Steel  Corporation  is  described  by  II.  I,.  Wilgus,  1901,  and  fully  by 
Meade  in  his  Trust  Finance.  (T.  also  The  Inside  History  of  the  Carnegie  Steel  Co., 
by  f.  II.  Bridge.  The  Coitifv  Ma^a-ine,\\\  1902-03,  devoted  a  number  of  articles  to 
the  more  prominent  combinations.  —  Fn.J 

-  A'eriew  of  Reviews,  XIX,  675. 

8  For  writings  dealing  primarily  with  railroad  discriminations,  see  II.  I>.  Lloyd. 
Wealth  against  Commonwealth  (New  York.  1894);  J.  Hardest}',  The  Mother  of 
Trusts,  185-208  (Kansas  City.  iSuo)  ;  I'routy,  in  Annals,  XV,  41  ;  Walker,  in  l-'oru»i, 
XXVII,  25(>-2^7  ;  Xewcomb,  in  (iitn/oii's  .)/</sw ;/;/<•,  XVII,  347. 

Miss  [(hi  M.  Tarbell's  History  of  the  Standard  Oil  Co..  which  appeared 
serially  in  1 00:1-04  in  .IfcC/nre**  Md^ti^iiit'.  and  is  about  to  appear  in  book 
form,  is  by  far  the  most  authoritative  study  which  has  been  made.  G.  H. 
Montague's  Rise  and  Progress  of  the  Standard  Oil  Co..  1903.  reprinted  from 
the  iJ/ttir/rT/v  Journal  <>f  Kii»itnnics.  is  rather  more  favorable  to  the  coinparu 
in  its  interpretation  of  its -history. —  Kl). 


438  TRUSTS,    POOLS   AND    CORPORATIONS 

F.  Walker  that  "the  trusts  have  the  railroads  by  the  throat," 
and  to  have  Mr.  Prouty,  of  the  Interstate  Commerce  Commis- 
sion, explain  the  precise  methods  by  which  the  federal  law 
against  discriminations  is  constantly  violated. 

Naturally  enough,  the  relations  of  trusts  to  the  protective 
tariff  have  claimed  the  attention  of  many  writers  ;  but  compara- 
tively little  work  has  been  devoted  primarily  to  this  subject. 
Economists  have  been  so  much  occupied  with  discussions  of  the 
advantages  of  large-scale  production  and  the  destructive  char- 
acter of  competition  that  they  have  probably  minimized  unduly 
the  importance  of  the  tariff  as  a  factor  in  the  present  situation. 
The  Industrial  Commission,  in  particular,  has  evinced  such  an 
anxiety  that  no  harm  to  the  cause  of  high  protection  shall  come 
from  its  investigations  as  to  lead  the  Philadelphia  Ledger  to 
remark,  in  a  recent  editorial,  that,  "  if  this  be  a  sample  of  the 
character  of  the  inquiry  the  Industrial  Commission  is  pursuing, 
it  might  as  well  suspend  its  hearings,  since  it  is  plainly  com- 
mitted to  the  preservation  of  the  trust-promoting  and  sustaining 
provisions  of  the  existing  tariff,  no  matter  how  glaring  may  be 
the  abuses  perpetrated  under  cover  of  its  schedules."  We  hardly 
need  to  be  informed  that  some  trusts  are  independent  of  tariff 
protection,  and  that  combinations  of  capital  exist  in  England 
under  free  trade ;  since  very  few  people  imagine  that  protective 
duties  are  the  sole  cause  of  trusts,  and  we  know  that  unrestricted 
foreign  competition  prevents  most  English  combinations  from 
abusing  their  powers.  The  chief  questions  worth  discussing 
are  whether,  as  Mr.  Havemeyer  alleges,  the  tariff  causes  over- 
investment in  certain  industries,  thus  producing  a  period  of 
depression  that  results  in  consolidation  ;  and  to  what  extent  the 
prices  of  tin-plate,  steel  rails,  wire  nails,  window  glass,  paper, 
salt,  sugar,  and  other  articles  control-led  by  trusts  or  pools,  have 
been  raised  to  exorbitant  figures  under  the  shelter  of  protective 
duties.  In  this  direction  the  New  lui gland  Free  Trade  League 
has  rendered  us  a  service  by  publishing  a  series  of  letters  relat- 
ing to  the  extortion  practised  by  many  of  the  trusts.1 

1  Twenty-four  Letters  relating  to  Trusts  and  the  Tariff  (Boston,  649  Tremont 
Building).  See,  also.  Taussig,  in  Quarterly  fonrnal  <•/"  Economics,  XIV,  500,  501, 
503,  507.  [Cf.  Liefmann,  Schut/xoll  und  Kartelle,  Jena,  '-"' 


TRUST   LITERATURE:    SURVEY   AND  CRITICISM      439 

(6)  In  the  sixth  class  belong  the  writings  of  the  panegyrists 
of  the  trust  movement.1  In  these  works,  industrial  combina- 
tions are  represented  as  the  greatest  invention  and  benefaction 
of  this  age  or  almost  any  other ;  and  those  who  hold  opposing 
views  are  designated  by  such  pleasing  terms  as  socialists,  dema- 
gogues, blackmailers  and  the  like.  Popular  discontent  against 
trusts  is  due  to  "hatred  of  wealth,"  hostility  to  capital  or  at 
least  to  the  desire  to  stir  up  class  feeling  and  organize  a  crusade 
against  prosperity.  Particular  mention  will  be  made  only  of 
Gunton's  Trusts  and  the  Public,  which  is  an  amorphous  collec- 
tion of  papers  written  at  various  times  during  the  last  dozen 
years.  The  author  is  most  outspoken  in  condemning  anti-trust 
agitation,  and  loud  in  his  praises  of  industrial  combinations, 
especially  the  Standard  Oil  Company.  A  noticeable  feature  of 
the  book  is  the  effort  made  to  refute  all  charges  brought  against 
this  organization.  In  the  earlier  papers,  written  before  1899, 
the  sugar  combination  figures  as  a  second  model  trust ;  but 
upon  this  subject  Mr.  Gunton's  views  changed  after  Mr.  Have- 
meyer  went  to  Washington,  and  told  the  Industrial  Commission 
that  the  tariff  is  "the  mother  of  all  trusts."  Before  that  time 
Mr.  Gunton  had  insisted  that  good  trusts,  like  the  sugar  and  oil 
combinations,  formed  for  economic  purposes,  are  not  monopo- 
lies;  but,  after  Mr.  Havemeyer's  fall  from  grace,  we  find  this 
author  denouncing  him  as  "a  cunning  monopolist."  In  a  paper 
written  in  1888,  which  forms  the  first  chapter  of  the  book,  Mr. 
Gunton  had  proved  that  fears  of  the  political  influence  of  trusts 
are  unfounded;  but  in  1899  he  wrote  that  the  activity  of  the 
sugar  magnates  in  Washington  had  become  "  a  national  scan- 
dal," as  bad,  in  fact,  as  anything  that  had  ever  "  occurred  in 

1  Although  works  of  this  class  have  been  distributed  broadcast,  the  writer  has  not 
been  able  to  secure  conies  of  all  of  them.  Those  at  hand  are:  II.  Apthorp,  Trusts 
and  their  Relation  to  Industrial  Progress  (Cleveland.  181)9);  <^-  R-  Mint,  Industrial 
( 'ombinations  (X.  P.,  X.  I).);  ('..  (lunton,  Trusts  and  the  Public  (\ew  York,  1899)  > 
I).  V.  Kennedy,  Frusts  :  An  Argument  from  Labor's  Stanlpoint  (N.  P.,  N.  D.). 
Mr.  S.  C.  T.  !>odd  has  brought  together  a  numb  T  of  papers  previously  published, 
and  they  no\\  appear  under  the  title  Trusts  'Xe\v  York,  icioo\  As  representative  of 
inaga/ine  articles  of  this  class,  see  K.  P.  l-'lowr,  in  (in>it<>n's  .l/</s'w: /;/• ,  XIII,  251; 
Ciimton,  in  (,'iintsn's  .i/</sw:/;/t',  XIX,  344.  [Cf.  The  Trust  :  Its  P>ook.  P,y  C.  R. 
Mint.  f.  J.  Hill,  S.  C.  T.  Uodd  and  MI!.  Thurber.  New  York,  1002.  —  F,i>.'] 


440  TRUSTS,   POOLS  AND   CORPORATIONS 

the  public  affairs  of  the  Republic."  Mr.  Gunton's  own  conclu- 
sion is  that,  "  Tariffs  and  trusts  should  be  discussed  on  their 
own  merits,  separately,"  —  a  method  that  certainly  possesses 
the  merit  of  convenience  for  those  who  entertain  views  similar 
to  his  own. 

(7)  Writings  of  the  seventh  class  we  will  designate  as  radi- 
cal,  since    they  come  from  those  who  advocate  most  radical 
methods  of  reform.1     Mr.  Hugh  Lusk  devotes  special  attention 
to  the  legislation  adopted  in  New  Zealand  to  check  the  growth 
of  monopoly.     Most  of  the  other  works  included  in  this  group 
have  much  to  say  concerning  the  relation  of  the  money  question 
to  the  trust  problem.     Thus  it  is  urged  that  the  era  of  falling 
prices  drove  producers  into  consolidation  ;  2  and  "  Coin  "  holds 
that  the  "  money  trust "  is  the  mother  of  all  others,  and  will  ulti- 
mately control  all  other  combinations.     Of   more   interest   are 
the  specific  references  to  the  consolidation  now  in  progress  in 
the  world  of  banking.3     Beyond  all  doubt  a  combination,  repre- 
sented by  such  institutions  as  the  National  City  Bank,  is  now 
under  way,  the  purpose  of  which  is  to  dominate  the  banking 
business  in  our  chief    financial   centres.      The  day  may  come 
when  all  economists  will  be  obliged  to  give  this  movement  their 
serious  attention. 

(8)  Our  eighth  class  includes  literature  on  the  legal  aspects  of 
trusts,  of  which  naturally  enough  the  output  has  not  been  small.4 

1  F.  A.  Adams,  Who  Rules  America  ?  (Xe\v  York,  1899)  ;  IT.  L.  Chaffee,  Book 
of  Trusts  (Chicago,  1900)  ;  YV.  H.  Harvey,  Coin  on  Money,  Trusts  an<l  Imperialism 
(Chicago,  1899);  II.  Lusk,  Our  Foes  at  Home  (Xew  York,  1899);  G.  II.  Shihley, 
A  Trust  of  Trusts  (Chicago,  1898);  The  Monopoly  Question  (Xew  York,  1900); 
Momentous  Issues  (Chicago,  1900). 

-  See  also  E.  B.  Andrews,  in  International  Journal  of  Ethics,  IV,  323,  and  Swain, 
in  Chicago  Conference  on  Trusts,  537-539. 

•!  See  facts  presented  in  Report  of  the  Anti-Trust  Conference,  326-327  ;  Shibley, 
Momentous  Issues,  77-78;  Harper,  Restraint  of  Trade,  342-345. 

4  For  hooks  see  C.  F.  Beach,  Treatise  on  the  Law  of  Monopolies  and  Industrial 
Trusts  (St.  Louis,  i8>8)  ;  F.  II.  Cooke,  The  Law  of  Trade  and  La!>or  Combinations 
(Chicago,  1898).  For  important  periodical  literature  see  American  I. a*v  Register, 
XXX,  751  ;  American  / aw  Review,  XXXIII,  63,499,  XXXIY,  186  ;  ffarrard  Law 
A'eTiew,  VII,  128,  157,  333;  American  Journal  of  Sociology,  I,  411  :  Political  Sci- 
ence Quarterly,  XII,  212,  622;  Quarterly  Journal  of  Economics,  XIV,  416;  I-'orum, 
XXVI,  452,  XXVIII,  732. 

The  best  collection  of  edited  cases  will  be  found  in  Cases  on  Restraint  of 


TRUST   LITERATURE:    SURVEY   AND   CRITICISM      44! 

It  is  not  the  purpose  of  this  article  to  emphasize  the  legal  side 
of  the  trust  question,  and  a  bare  outline  of  the  results  of  recent 
discussions  will  suffice.  The  advocates  of  trusts  believe  that  the 
legal  position  of  these  corporations  is  now  unassailable.  It  is 
conceded  that  old-fashioned  "  conspiracies  to  engross  the  neces- 
saries of  life"  are  unlawful,  and  that  the  early  trust  agreements  or 
such  contracts  as  that  of  the  Addyston  Pipe  combination  cannot 
be  sustained.  But  the  large  corporations  now  known  as  trusts 
are  deemed  perfectly  secure,  since  the  powers  of  Congress  to 
regulate  interstate  commerce  do  not,  under  the  decision  of  the 
Supreme  Court  in  the  Knight  case,1  extend  to  manufacturing 
enterprises  ;  while  the  states  cannot  prevent  their  citizens  from 
selling  their  property  to  domestic  corporations  or  restrain  them 
from  purchasing  the  products  of  foreign  companies.  Upon  the 
other  hand  there  are  those  who  contend  that  the  formation  of 
a  monopoly  is  illegal,  whether  this  is  done  by  means  of  a  pool, 
a  trust  or  an  incorporated  company;2  and  there  are  not  want- 
ing writers  who  declare  that,  although  state  corporations  engaged 
in  manufactures  are  not  directly  amenable  to  the  power  of  Con- 
gress to  control  interstate  commerce,  nevertheless  these  com- 
panies can  be  reached  indirectly  by  laws  excluding  the  products 
of  monopolistic  combinations  from  interstate  commerce,  prohib- 
iting such  organizations  from  using  the  mails,  and  employing 
other  drastic  measures.3 

Trade,  by  Professor  Bruce  Wymnn  of  the  Harvard  Law  School.  See  also 
Xoyes  on  IntiTcorporate  Relations  and  Dill  on  Corporations,  both  of  1902.  the 
latter  especially  on  New  Jersey  practice.  F.  E.  Horack.  Organization  and 
Control  of  Industrial  Corporations,  Philadelphia.  1903.  compiles  the  law  as  to 
publicity.  —  Ki>. 
1  i;6~C.  S..  i. 


commerce. 

:;  Hesidrs  these  eiyht  classes  of  writ  inns  there  remain  three  pamphlets,  fur  which 
a  single  not--  will  suffice.  Two  of  these  are  l>v  socialists:  J.  1'..  Smiley,  To  \\hat  are 
Trusts  1,-a'in^?  (Chicago,  iSu<0;  ]!.  ISouroff.  The  Imp--n'!inij  Crisis  :  (  hicasjo, 
1000  .  The  thinl  dcscriliLS  a  fanners'  trust,  I..  L.  Hopkins,  The  Coining  Trust 
(Xe\v  Y<  irk.  i'ioo\ 


442  TRUSTS,   POOLS  AND   CORPORATIONS 

II 

Of  the  many  important  questions  involved  in  the  study  of 
trusts,  the  most  fundamental  concerns  the  alleged  monopolistic 
character  of  these  combinations ;  and,  since  diagnosis  must  pre- 
cede the  rational  treatment  of  the  disease,  — if  disease  there  be, 
—  this  aspect  of  the  problem  may  be  considered  to  possess  the 
greatest  theoretical  and  practical  importance.  What,  then,  do 
recent  discussions  have  to  say  upon  this  subject  ? 

From  a  number  of  writers  we  meet  the  contention  that  the 
trusts  are  not  monopolies  in  any  proper  sense  of  the  term.1 
Mr.  Gunton  argues  that,  whenever  these  combinations  have 
secured  control  of  their  respective  industries,  this  power  has 
come  from  their  ability  to  render  cheaper  and  better  service, 
and  not  from  the  possession  of  any  exclusive  privileges.  So 
that  potential  competition  always  remains,  and  monopoly  can- 
not be  said  to  exist.  Mr.  Dodd  says  that,  since  "all  are  free 
to  combine,"  competition  is  not  destroyed,  but  is  merely  "moved 
to  a  higher  plane."  Mr.  Robinson  tells  us  that,  while  trusts 
may  involve  "  the  repression  of  competition,"  they  are  monopo- 
lies neither  "in  scope  nor  method  " ;  and  many  similar  citations 
might  be  given  if  space  would  permit.  But  some  of  those  who 
entertain  this  view  of  the  case  have  adopted  a  very  different 
tone  when  discussing  such  unfortunate  enterprises  as  the  New 
York  Ice  combination,  which,  for  some  singular  reason,  was  not 
considered  an  orthodox  trust  in  good  and  regular  standing. 

Some  legal  writers  are  inclined  to  insist  upon  a  narrow 
definition  of  monopoly,  which  would  restrict  it  to  those  cases 
where  a  person  or  company  enjoys  an  exclusive  grant  from  the 
government.2  Thus  Mr.  Knox  declares:  "Monopolies  can  only 
exist  by  grant  from  the  sovereign.  They  cannot  be  created  by 
contract  between  individuals."  Mr.  Dodd  would  define  monop- 

1  For  the  references,  in  order,  see  Gunton,  Trusts  and  the  Public,  5,  7,  8,  36  ; 
Guntoii's  JTagazine,  XIX,  3:0,  351  ;  Dodd,  Trusts,  44;  Robinson,  in  Const'rratii'e 
Revieiv,  IV,  50,  52.  See  also  Chicago  Conference,  476;  Apthorp,  Trusts,  ii: 
Journal  of  Political  Economy,  VIII,  29;  Rn-nm,  XXVII,  260. 

-See  American  Law  Register,  XXXVI,  423;  Dudd,  Trusts,  36,  37;  Chicago 
Conference,  86. 


TRUST    LITERATURE:    SURVEY  AND   CRITICISM      443 

oly  as  "  a  grant  by  the  government  for  the  sole  buying,  working, 
making  or  using  of  anything";  and  Mr.  Weil  adopts  a  similar 
definition.  In  further  support  of  this  view,  a  few  decisions  of 
our  courts  may  be  cited.1  But  the  general  trend  of  the  deci- 
sions is  overwhelmingly  in  the  contrary  direction;2  and  Mr. 
F.  H.  Cooke  makes  a  correct  statement  of  the  present  legal 
doctrine  when  he  says,3  "Within  a  comparatively  recent  period 
the  conception  of  a  monopoly  has  been  extended  from  a  right 
created  by  government  to  a  condition  produced  by  the  acts  of 
mere  individuals ;  thus,  where  within  a  given  area  all  sales 
of  a  given  article  are  made  by  a  single  individual  or  set  of 
individuals."  4 

The  vast  majority  of  writers  recognize  that  the  trusts  gener- 
ally attempt  to  secure  a  monopoly  and  actually  possess  monopo- 
listic features,  —  a  fact  upon  which  it  is  unnecessary  to  dwell. 
But  oftentimes  the  word  "  monopoly  "  is  qualified  by  the  use 
of  such  adjectives  as  "partial,"  "incomplete,"  "precarious" 
or  "temporary."'"'  It  is  clear,  furthermore,  that  the  meaning 
attached  to  the  term''  is  such  a  degree  of  control  over  the  sup- 
ply of  a  commodity  as  enables  the  person  or  persons  possess- 
ing it  to  control  the  price,  and  fix  charges  at  something  more 
than  the  normal  competitive  rate.  In  order  to  be  complete,  the 
monopoly  must  be  able  to  maintain  prices  at  the  point  of  high- 
est net  returns. 

1  52  Keel.  Rep.,  115,  507. 

-54  Hun.  354,  350,  37(1,  379;  30  X.  E.  R.,  279,  200;  44  Fed.  Rep.,  721; 
85  Fed.  Rep.,  271;  150  I'.  S.,  ID,  iS;  160  U.  S..  322;  175  V .  S..  244.  The  follow- 
ing words  of  ( 'liicf  Jii->tii-e  Fuller  seem  to  settle  the  <]itesti.  m  :  "  A^ain.  all  the  author- 
ities ai^ree  that  in  order  to  vitiate  a  contract  or  combination  it  is  not  essential  that 
its  result  should  he  a  complete  monopoly.  It  is  sutticietit  if  it  really  tends  to  that 
end  and  to  deprive  the  puMic  of  the  advantages  which  tlow  from  free  competition.'' 
156  I".  S.,  I o. 

:i  Law  of  Trade  and  T.ahor  Combinations,  04.  o;. 

4  For   other  Ir^.il  writers  holding  the  same  view,  see  Huft'cut,  in  Industrial  Com- 
mission. I,  part  2.  ]>.   1211;    (laiilier   and    Keasbey.  in   Chicaj,r->   Conference,  286,  3*4. 
and  //,n-r;i;;/  /tnc  AYryV:,'.  Mil,  199. 

5  It-nks,  Trust    Problrm.oi:    Sherwood,   in     )',//:•   A\  :  /•  v,  V 1 1 1.  31',; ;    Collier,  The 
Trusts.    ;O2;    P>ro,-k>,  in    ('hir.i^  >   Cmiferen    e.  (>2:    Forrest,  in  . /;v.-v/<v;/    fcurnal  <"'f 
,V>  ,-/,  .'I^T,  V.  241.      (  Mi  the  other  hand.  Andrews  say.,  the  trusts  mean  "absolute   mo- 
nopoly" o|  a  permanent  character.      Inl?riiiitii>nnl  Journal  of  Kthits,  IV,   ^2;,  320. 

"  /,'..,.  see  F.!y,  Monopolies  and  Trusts,  i.i:     |t-nks,  Trust  Problem.  (14,  (">:;. 


444  TRUSTS,   POOLS  AND   CORPORATIONS 

The  conclusion  that  the  element  of  monopoly  inheres  in  the 
trust  movement  is  based,  in  the  first  place,  upon  evidence  con- 
cerning the  purposes  for  which  combinations  are  formed.  Prom- 
inent business  men  who  have  declined  invitations  to  enter  trusts, 
or  have  had  knowledge  of  the  circumstances  attending  the  forma- 
tion of  such  enterprises,  state  most  explicitly  that  the  main  in- 
ducement held  out  to  the  owners  of  the  plants  which  are  to  be 
combined  is  the  prospect  of  controlling  the  market  and  exacting 
higher  prices.1  Then  the  prospectuses  issued  by  many  combina- 
tions tell  the  same  story,  and  control  over  the  greater  part  of 
the  output  must  generally  be  secured  before  the  promoter  can 
make  his  proposition  attractive  to  financiers  and  investors.2 
Such  control  must  be  obtained  at  all  hazards,  even  at  the 
expense  of  paying  extortionate  prices  for  efficient  plants  or  buy- 
ing worthless  factories  at  substantial  valuations.3  Moreover, 
the  tactics  employed  to  stifle  possible  competition  are  decidedly 
unlovely,  and  are  almost  inexplicable  upon  any  other  assumption 
than  that  a  desire  exists  to  secure  monopolistic  powers.4  Finally, 
several  trust  magnates  have  admitted  that  the  purpose  of  their 
companies  was  to  control  output  and  prices,  and  have  conceded 
that  this  had  been  accomplished.5 

But  the  best  evidence  of  the  existence  of  such  intent  is  the 
fact,  which  appealed  so  strongly  to  Judge  Taft  in  the  Addyston 
case,6  that  monopolistic  powers  have  been  exercised.  Econo- 

1  See  T.  B.  Walker,  in  Chicago  Conference,  540,  541;  J.  S.  Pillsbury,  in  Xettle- 
ton,  250,  251;  Griffiths,  in  Report  Industrial  Commission,  I,  176. 

-  See  Annals,  XVI,  358;  Commercial  and  Financial  Chronicle,  July  23,  1898; 
Xettleton,  Trusts,  52. 

3  Thus  one  concern  held  up  the  American  Tobacco  Company  for  $12,500,000  in 
cash.     Annals,  XVI,  364.     See,  further,  Collier,  67,  68;    von   Halle,  61;    Xettleton, 
250;    Carnegie,  in  Centurv,  LX,  148. 

4  Passing   over  the  more  objectionable  tactics,  a   single   instance  may  be  cited. 
The  American  Tin- Plate  Company  made  contracts  with  manufacturers  of  machinery 
by  which  the  combination   was  to  purchase  the  entire  output.      Yale  Reriew,  VIII, 
167;    Industrial  Commission,   I,    179.     Could    evidence   of  monopolistic   purpose  be 
clearer? 

0  McXulta,   Havemeyer  and   dates.      Industrial  Commission,  I,  60,  63,  81,  part  2, 
1009,  1010.     Jeiiks  says  that  in  private  conversation  such   persons  will   usually  admit 
that  the  chief  purpose   "has    been   to  check   competition."      Quarterly  Journal  of 
Economics,  XV,  47. 
r 


TRUST    LITERATURE:    SURVEY  AND   CRITICISM       445 

mists  do  not  need  to  be  told  that  a  combination  that  produces 
from  70  to  90  per  cent  of  the  supply  can  substantially  control 
prices,1  and  this  is  admitted  by  such  expert  witnesses  as  Messrs. 
Havemeyer  and  Archbold.2  It  is  well  known  that  many  trusts 
control  from  65  to  95  per  cent  of  the  products  of  their  respec- 
tive industries,3  and  that  some  of  them  announce  from  day  to 
day  the  prices  that  prevail  in  domestic  markets.4  Therefore, 
we  are  not  surprised  to  learn  that  the  most  reliable  investigation 
into  prices5  shows  that,  in  almost  every  case,  combinations  have 
managed  to  increase  the  margin  G  between  the  cost  of  materials 
and  the  price  of  the  finished  product  for  considerable  periods  of 
time."  This  fact  establishes  the  existence  of  monopolistic  intent 
and  monopolistic  power. 

Ill 

Since  most  writers  recognize  that  the  recent  combinations  of 
capital  have  developed  monopolistic  tendencies  to  a  considerable 
extent,  the  outlook  for  the  future  becomes  a  most  interesting 
and  important  problem.  Under  all  the  circumstances,  it  is  not 
surprising  that  recent  years  have  witnessed  numerous  attempts 
to  bring  the  control  of  various  industries  into  the  hands  of  single 
corporations  of  colossal  magnitude,  which  possess  and  exercise 
the  power  of  monopoly.  But  the  reader  of  recent  trust  litera- 
ture finds  that  many  writers  of  recognized  authority  contend 

1  Only  ('.union  denies  this.      See  Clinton  s  Magazine,  XVIII,  566. 

"  Industrial  Commission,  I,  60,  129. 

:i  See  Industrial  Commissions,  I,  18,  19;    Bulletin  of  Department  of  Labor,  Xo.  29, 

PI'-  7.^.  /.vS- 

4  Industrial  Commission,  I,  19;    Bulletin,  708. 

•-'  Industrial  Commission,  I,  39-57;    Bulletin,  708—765;    Jenks,  130-170. 

''  On  this  method  of  procedure  see  Bulletin,  709,  710. 

7  1'artisans  of  the  trusts  follow  generally  one  of  t\vo  methods  when  presenting 
statistics  ol  prices.  Sometimes  they  naively  quote  merely  the  prices  of  refined  oil 
from  1872  to  the  present,  and  claim  for  the  trust  the  credit  of  the  reduction.  See 
Dod'l.  Trusts,  25,  2f>,  56;  Flower,  in  diinton's  .l/,/^<r:i>i,',  XIII,  254;  Cunton,  Trusts 
and  tlv  1'ulilic,  2iS.  In  other  cases  they  exhiiiit  tables  sh  >wiiii,r  the  margin  between 
the  prices  of  crude  an  1  refined  oil  from  1871  down  to  the  time  of  writing,  and  claim 
fir  the  trr.st  the  credit  of  the  decline.  Here  they  carefully  avoid,  comparing  the 
margin  before  the  formation  of  the  trust  in  1882  \\ith  the  margin  since  that  date. 
Sec  I  >odd,  02,  93,  94;  Gunton,  14.  Comment  upon  any  uf  these  performances  i-' 
needle- . 


446  TRUSTS,   POOLS  AND   CORPORATIONS 

that  these  conditions  of  centralized  control  are  to  be  permanent  in 
industries  that  require  heavy  investments  of  capital  for  their  suc- 
cessful prosecution,  and  that  competition  is  a  thing  of  the  past. 
In  considering  this  proposition,  careful  discrimination  is  nec- 
essary at  the  very  outset.  There  are  three  possible  conditions 
under  which  industries  may  be  conducted, —  production  upon 
a  small  scale,  production  upon  a  large  scale  and  centralized 
management  by  a  single  company  or  combination.  Every  stu- 
dent of  economic  history  knows  that  production  upon  a  small 
scale  was  long  ago  superseded  in  most  important  branches  of 
manufactures  by  undertakings  of  a  large  size.  The  combina- 
tions of  recent  years  have  sought  to  replace  these  large  estab- 
lishments by  single  consolidated  enterprises;  and  this  is  the 
real  meaning  of  the  trust  movement  and  the  arguments  ad- 
vanced to  prove  its  natural  and  desirable  character.  No  one 
wishes  to  revert  to  the  stage  when  production  was  carried  on 
by  small  establishments.  Controversy  exists  only  concerning 
the  advantages  of  superseding  large-scale  production  by  com- 
binations that  include  all  important  establishments  in  a  single  line 
of  business.  The  "industrial  combination,"  which  those  who 
take  a  generally  favorable  view  of  trusts  are  upholding,  must 
mean  the  replacement  of  independent  enterprises  already  con- 
ducted on  a  large  scale  by  a  single  centralizad  management. 
To  combinations  of  this  character  writers  may  or  may  not  apply 
the  term  "monopolies";  but  the  real  issue,  nevertheless,  is  the 
alleged  superiority  of  a  single  body  of  producers  over  indepen- 
dent rival  concerns.  When  it  is  contended  that  combination 
means  not  "necessarily  one  great  trust,  comprising  one  great 
industry,"  but  merely  "an  enlargement  of  capital,"1  we  must 
insist  that  this  is  not  what  the  arguments  in  favor  of  centraliza- 
tion are  considered  or  designed  to  prove.  When  another  writer 
tells  us  that  combination  may  be  contrasted  not  with  competi- 
tion, but  with  "isolation,"  —  by  which,  probably,  production  in 
small  establishments  is  to  be  understood,  —  we  may  properly 
remind  him  that  in  his  own  works  combination  is  used  as  the 
opposite  of  competition,  and  that  he  says  that  sometimes  "  indus- 

1  Apthorp,  Trusts,  25. 


TRUST    LITERATURE:    SURVEY   AND    CRITICISM      447 

trial  units  which  are  necessary  for  proper  utilization  of  labor 
become  so  large  as  to  produce  actual  monopoly." l  When 
others  tell  us  that  the  trusts  have  seldom  secured  that  immu- 
nity from  competition  which  monopoly  implies,2  it  must  be 
replied  that  this  fact  serves  merely  to  discredit  some  of  the 
arguments  intended  to  prove  the  superiority  of  consolidation, 
and  does  not  alter  the  purpose  for  which  these  arguments  are 
advanced.  If  the  tendency  towards  combination  means  any- 
thing, it  means  the  substitution  of  centralized  and  consolidated 
management  for  the  rivalry  of  independent  concerns  ;  and  this 
may  fairly  be  termed  monopoly.  If,  furthermore,  the  advocates 
of  combinations  intend  to  defend  nothing  more  than  production 
upon  a  large  scale,  they  should  revise  their  list  of  arguments 
designed  to  prove  that  competition  is  "  wasteful,"  "  destructive," 
"suicidal,"  and  "a  thing  of  the  past";  and  should  make  it 
clear  that  they  do  not  uphold  the  action  of  most  of  our  trusts 
in  consolidating  all  establishments  of  a  given  class,  in  order  to 
"regulate  production"  or  to  "remove  the  evils  of  competition." 
We  may  advise  the  reader,  therefore,  to  grasp  firmly  the  dis- 
tinction between  large-scale  production  and  monopoly,  and  to 
note  carefully  whether  the  arguments  advanced  in  favor  of  com- 
bination relate  to  the  one  thing  or  the  other.  Unless  this  is 
done,  clearness  of  thought  becomes  impossible. 

Does  the  trust  movement,  then,  mean  a  permanent  regime 
of  monopoly  in  industries  where  large  amounts  of  capital  must 
be  employed  ?  Some  writers  who  consider  the  movement  to 
be,  upon  the  whole,  a  desirable  development  in  industry,  answer 
clearly  in  the  negative.  Thus  Professor  Sherwood  says 3  that 
the  dominant  position  which  trusts  now  enjoy  depends  mainly 
upon  "monopoly  of  undertaking  ability,"  and  that  this  is  "in 
its  nature  temporary  and  the  result  of  a  competitive  process." 
The  large  gains  that  now  accrue  to  these  monopolistic  enter- 


1  See  Iladlev,  in  Atlantic  .]/o;////.V,  LXXIX.  :,--,  ;;S.  With  this  compare  Had- 
lev's  Kcononiics,  15}.  1^4.  The  p.i-s.iLje  <ju  .ted  ivfers  inline  Hatch"  to  public  service 
in  lustries,  bat  at  the  bmtnin  <>\  paj^e  154  the  author  applies  this  and  uther  argu- 
ments to  uther  branches  of  Im>incss. 

-  Collier,  10(1;    von  Halle.  72;    (Juntoii's  Mitgnzint,  XIX,  350:   Apthorp,  n. 

3   }'</A'  AYrv'tT.',  VI 1 1,   }i>y-;uS. 


448  TRUSTS,   POOLS  AND   CORPORATIONS 

prises  are  merely  a  temporary  reward  for  the  development  of  a 
superior  form  of  business  organization.  And  Mr.  Carnegie, 
Mr.  Dill,  Mr.  Wanamaker,  and  others1  insist  that  "every 
attempt  to  monopolize  the  manufacture  of  any  staple  article 
carries  within  its  own  bosom  the  seeds  of  failure,"  or  that  "  no 
men,  or  body  of  men,  have  ever  been  able,  or  will  be  able, 
permanently  to  hold  control  of  any  one  article  of  trade  and 
commerce." 

But  the  arguments  of  most  of  those  who  take  a  favorable 
view  of  trusts  cannot  be  given  such  interpretation.  Some 
writers  state  clearly  and  frankly2  that  "the  competitive  system 
of  industry  is  fast  passing  away,"  and  that  all  lines  of  business 
"are,  or  soon  are  to  be,  monopolized";  that  "monopolies  of 
every  sort  are  an  inevitable  result  from  certain  conditions  of 
modern  civilization";  "that  experience  seems  to  justify  the 
belief  that  monopoly  within  certain  limits  .  .  .  may  be  secured 
simply  by  the  possession  of  large  capital";  or  that  trusts  rep- 
resent "a  vast  accumulation  of  productive  resources  which 
renders  the  competition  of  small  concerns  hopeless."  And  this 
is  the  view,  of  course,  which  is  entertained  by  persons  of  social- 
istic tendencies.3  Sometimes  it  is  attempted  to  add  force  to 
such  arguments  by  calling  combination  the  result  of  an  evolu- 
tionary process  of  survival;  and  one  writer  remarks4  that  the 
trust  is  "  an  evolution  from  the  heterogeneous  to  the  Jionwgcne- 
ous,"-  —  a.  statement  which  will  interest  those  who  happen  to 
remember  the  Spencerian  formula. 

15 ut  other  economists  are  less  explicit.  Writing  of  the  trusts, 
von  Halle  says5  that  "in  the  manufacturing  industries,  the  vic- 
tory of  production  on  a  large  scale  seems  assured  "  ;  and  he 

1  Century  Magazine,  LX,  148;  Dill,  The  Corporate  Proposition,  18;  Corporations 
and  Public  Welfare,  I2,S;  (  hicng •>  Conference,  576,  623. 

*  See,  in  order,  Andrews,  in  International  /ournal  of  Ethics,  IV,  321,  333;  Baker, 
159;  Jenks,  64,  65;  Auuriian  Journal  of  Sociology,  V,  232.  With  these  see  Kinley, 
in  Progress  V,  iS;  Shaw,  in  Xettleton,  36,  41. 

;i  See  writer  quoted  by  Ply,  Monopolies,  146;  J.  A.  Ilobson,  Evolution  of  Modern 
Capitalism,  126  (London,  1894).  4  Century  Ma^r.mc,  LX,  144. 

•>  Trusts,  63,  140,  149.  For  another  failure  to  make  clear  the  distinction  be- 
tween large-scale  production  and  monopoly,  and  therefore  a  failure  to  convey  a  clear 
impression  to  the  reader,  see  llolt,  in  AVrvVre  uj '  Rerieics,  XIX,  675. 


TRUST    LITERATURE:    SURVEY   AND    CRITICISM      449 

concludes  his  work  with  the  somewhat  oracular  remark  that 
"  the  future  belongs  neither  to  the  prophets  of  individualism, 
nor  to  the  ideals  of  the  social  democrats."  Mr.  Brooks  thinks 
that  "  practical  monopolies  "  have  been  formed,  but  that  they  can 
be  permanent  only  in  case  "  they  put  some  kind  of  economic 
superiority  upon  the  market." 1  Mr.  Collier,  rather  incon- 
sistently, says  that  competition  is  "  business  committing 
suicide,"  and  then  thinks  that  the  trusts  will  be  controlled  by 
potential  competition.2  Professor  Bemis  looks  upon  a  trust  as 
"virtually  a  monopoly  of  large  capital,"  possessing  "vast  possi- 
bilities of  social  advantage  "  ;  but  thinks  that  we  cannot  pro- 
nounce a  final  judgment  "  until  we  have  first  removed  all  special 
privileges." 3  And,  finally,  President  Hadley  believes  that 
modern  conditions  "  work  in  favor  of  those  who  advocate  com- 
bination, and  make  it  harder  for  independent  competitors  to 
resist  it,  or  for  the  law  to  prohibit  it  on  grounds  of  public  policy  "  ; 
yet  he  holds  that,  if  prices  are  raised  unduly,  "  new  capital  will 
come  into  the  business."4  But,  if  the  advantages  of  industrial 
combinations,  in  both  producing  and  marketing  their  products, 
are  as  great  as  most  of  these  writers  affirm,  it  is  hard  to  see 
how  unity  of  management  can  fail  to  secure  ultimate  control 
of  most  branches  of  manufactures.  The  lack  of  explicit  fore- 
casts of  the  future  need  not,  therefore,  prevent  us  from  con- 
cluding that  the  general  position  of  these  economists  is  that  a 
tendency  to  permanent  monopoly  may  be  clearly  recognized. 

But  economists  who  think  that,  for  the  future,  monopoly  is  to 
be  the  order  of  the  clay,  generally  consider  that  this  control  of 
industry  will  be  limited  by  what  is  termed  potential  competition. 
Thus  they  do  not  affirm  that  absolute  monopoly  will  prevail,  but 
merely  such  a  control  of  production  and  prices  as  will  not  tempt 
new  capital  into  the  field.  To  this  subject  we  shall  return  in 
our  later  paragraphs. 

Attention  may  now  be  directed  to  the  reasons  for  this  belief 

1  Chicago  Conference,  62.  -  The  Trusts,  53,  143,  106. 

3  Chicago  Conference,  395.  399  ;    Report  of  Anti-Trust  Conference,  339,  342. 

4  KcMi'imics,  153,  161.     In  Scril>ner''s  J/ii^ii:i>ii',  XXVI.  607.  he  is  more  explicit, — 
sufficiently  so,  perhaps,  to  justify  our  classing  him  \vith  the  writers  mentioned  in  the 
previous  paragraph. 


450  TRUSTS,    POOLS   AND   CORPORATIONS 

in  the  tendency  of  large-scale  production  to  pass  over  into 
monopoly,  and  to  the  criticism  which  such  views  evoke  from 
writers  who  deny  the  existence  of  such  a  tendency.  In  favor 
of  this  proposition  three  general  lines  of  arguments  may  be  dis- 
tinguished :  (a}  the  contention  that  a  consolidated  enterprise 
possesses  advantages  over  independent  companies  in  producing 
and  marketing  its  goods  ;  (b)  the  claim  that  mere  mass  of  capi- 
tal confers  powers  of  destructive  warfare  so  great  as  to  deter 
possible  competitors  from  entering  the  field ;  (c)  the  belief  that 
modern  competition  between  large  rival  establishments,  repre- 
senting heavy  investments  of  fixed  capital,  is  injurious  to  the 
public,  ruinous  to  the  producers  and  in  its  final  outcome  self- 
destructive.  As  our  discussion  proceeds,  it  will  become  evident 
to  the  reader  that  all  of  these  arguments  can  be  employed,  with 
consistency,  only  by  those  who  believe  that  the  competitive 
regime  is  to  be  replaced  by  an  era  of  monopoly. 

IV 

First  in  this  list  is  the  contention  that  a  consolidated  concern 
is  a  more  efficient  agent  of  production  and  exchange.  It  is 
claimed  that  a  combination  can  effect  a  saving  in  no  less  than 
twenty  different  directions;1  and  the  economy  arising  from 
such  sources  is  declared  to  be  great  enough  to  give  the  trust  a 
control  over  the  market  based  solely  upon  superior  efficiency,2 
and  to  make  competition  "hopeless."3  For  this  reason  it  is 
held  that  such  combinations  may  confer  "  enormous  "  benefits 
upon  society.4  The  critic  may  well  entertain  the  suspicion, 
however,  after  reading  what  is  said  upon  this  subject,  that  these 
arguments  prove  almost  too  much  ;  for,  if  in  twenty  directions 
substantial  economies  may  be  realized  by  a  combination,  it 
would  seem  that  the  utter  futility  of  competition  would  have 
been  recognized  by  the  business  world  long  ago.  If  these  argu- 

1  For  detailed  lists  of  these  economies  see  Baker,  9-14  ;    Jenks,  21-43,  212-213  ; 
Gunton,   u,    12,   37,   38;     Ely,    145-160;    C'ollirr,   61-77;     Quarterly  Journal  of 
Economics,   XV,  49  ;    Progress,  V,   23-25  ;    Xettleton,    19,  20,   25-27. 

2  See  Gunton,  Trusts,  5,  36  ;    Gnntoti's  Mn^/r^ine,  XIX,  350,  351  ;    Chicago  Con- 
ference, 476,  477,  588.  3  American  Journal  of  Suciology,  V.  232. 

1  Jcnks,  213.     See  also  Baker,  25  ;    Collier,  37-39  ;    J'i'i'grdss,  V,  18. 


TRUST   LITERATURE:    SURVEY   AND   CRITICISM      451 

ments  be  altogether  true,  how  is  it  that  the  trusts  find  competi- 
tion so  troublesome,  and  consider  it  "good  business"  to  resort 
to  the  most  disagreeable  means  of  driving  "interlopers"  out 
of  the  field  ?  Such  tactics  are  decidedly  "  bad  business,"  if 
they  are  needless ;  and  we  can  hardly  think  that  the  shrewd 
managers  of  the  trusts  would  care  to  arouse  public  resentment 
by  unnecessarily  harsh  methods. 

To  consider  this  line  of  argument  in  any  complete  manner 
would  expand  this  article  into  a  volume ;  and  we  can  discuss, 
therefore,  only  some  of  the  more  important  savings  that  trusts 
are  believed  to  realize.  Of  the  twenty  specific  economies  that 
have  been  enumerated,  we  shall  take  no  notice  of  five  which 
may  be  considered  either  doubtful  or  of  minor  importance.1  Six 
others  will  be  relegated  to  a  foot-note,  since  it  may  be  denied 
emphatically  that  they  represent  any  substantial  advantages 
which  large  independent  companies  cannot  secure.2  Three  more 

1  These  alleged  advantages  are:  (i)  combinations  will  prevent  adulteration  and 
improve  products  ;  (2)  they  will  reduce  losses  from  unwise  extension  of  credits  ; 
(3)  they  will  not  suffer  from  stoppage  of  work  by  accidents  in  any  one  locality,  or 
by  labor  troubles  ;  (4)  they  need  to  carry  smaller  stocks  of  goods  to  meet  demands 
of  the  market  ;  (5)  they  may  eliminate  needless  middlemen. 

-  These  six  items  illustrate  the  necessity  of  discriminating  sharply  between  large- 
scale  production  and  monopoly,  (i)  It  is  said  that  combinations  can  specialize  the 
machinery  of  the  separate  plants,  thus  saving  the  loss  resulting  from  changing  from 
one  kind  of  work  to  another.  Jenks,  ,6,  37.  But  large  independent  concerns  have 
often  done  the  same  thing.  (2)  Combinations  can  push  trade  in  foreign  markets. 
Hut  large  independent  companies  have  been  equally  successful,  or  almost  so.  This 
claim  provokes  a  smile  from  a  Minneapolis  miller.  See  Nettletun,  250.  Such  con- 
cerns as  the  Baldwin  I-ocom  itive  Company  deny  that  c<  mbination  is  necessary  for 
this  purpose.  Rivals  of  the  Stan  lard  Oil  Company  are  now  following  the  trust  into 
European  markets.  Industrial  Commission,  I,  22.  The  Industrial  Commission  con- 
cluded that  foreign  trade  does  not  need  a  monopoly.  (>/>.  cit.,  25.  Wherever  a 
combination,  by  keeping  domestic  prices  at  high  figures,  is  able  to  sell  a  larger  surplus 
abroad  at  low  rates,  we  may  deny  the  desirability  of  such  extension  of  trade.  (  >n 
the  general  subject  see  Xettleton,  65-66.  (  5)  Trusts  can  conduct  auxiliary  or  sub- 
sidiary industries.  So  do  many  independent  enterprises.  Note  Taussig's  descrip- 
tion of  the  extent  of  the  activities  of  our  large  iron  and  steel  companies.  Quarterly 
Jinirnal  of  Economics,  \\\,  150,  160.  (4)  Trusts  utili/e  by-products.  So  do  large 
independent  establishments,  \\hile  small  establishments  sometimes  cooperate  for  this 


452  TRUSTS,   POOLS   AND   CORPORATIONS 

may  be  set  aside  for  incidental  discussion  1  in  connection  with 
the  views  of  those  who  deny  the  tendency  to  monopoly.  Of  the 
remainder,  three  items  relate  to  advantages  in  the  manufacture 
and  three  to  economies  in  the  exchange  of  products. 

Thus  it  is  claimed  that  trusts,  by  filling  orders  from  the  nearest 
plant,  can  effect  a  great  saving  in  cross-freights.  Data  upon  this 
question  are  available  in  the  recent  Bulletin  of  the  Department 
of  Labor.2  Of  the  forty-one  combinations  reporting,  twenty- 
seven  failed  to  answer  this  question,  nine  claimed  a  saving 
from  this  source,  and  five  stated  that  there  was  no  gain.  Of 
the  nine  reporting  a  saving,  the  Bulletin  states  the  amount  only 
in  three  cases ;  and  in  two  of  these  the  item  of  cross-freights 
was  combined  with  other  economies,  the  aggregate  sums  being 
$400,000  and  "considerably  over  $500,000."  This,  be  it  remem- 
bered, is  the  trusts'  own  showing,  and  is  certainly  not  an  under- 
estimate. The  reason  for  these  comparatively  small  results  is 
not  difficult  to  discover,  and  has  been  recently  explained  by  a 
writer  who  has  heretofore  emphasized  most  strongly  this  particu- 
lar economy  of  consolidation.3  When  the  monopolized  product 
is  of  a  bulky  sort,  the  industry  is  already  localized  pretty  thor- 
oughly before  combination  takes  place ;  and,  since  most  of  the 
former  independent  establishments  were  producing  chiefly  for 
their  natural  local  constituencies,  the  trust  can  save  little  in 
cross-freights.  When,  however,  the  product  is  light,  transporta- 
tion charges  become  a  matter  of  small  moment.  In  either  case 
the  room  for  saving  in  cross-freights  is  not  nearly  as  large  as 
has  been  represented,  while  often  it  does  not  exist. 

Then  it  is  urged  that  a  trust  can  draw  upon  all  the  patented 
devices  of  the  constituent  companies,  and  employ  only  those 
that  are  most  efficient.  But  advantages  accruing  from  this  fact 
will  in  most  cases  prove  to  be  of  a  temporary  nature,  as  trusts 
that  have  tried  to  base  a  monopoly  upon  the  control  of  all  avail- 
able patents  have  learned  in  the  past,  and  will  learn  in  the 
future.  Moreover,  a  simple  reform  in  our  patent  laws  will  make 

1  These  three  advantages  are:  (i)  combinations  can  specialize  skill  in  manage- 
ment ;  (2)  they  can  compare  methods  and  costs  of  production  in  different  plants  ; 
(3)  fixed  charges  decrease  as  the  size  of  the  enterprise  increases. 

-  Mulletin,  \o.  29.  p.  673.       3  Jenks,  in  Quarterly  Journal  of  EiOiio/itus,  XV,  _)<j. 


TRUST    LITERATURE:    SURVEY   AND   CRITICISM      453 

the  best  processes  available  for  all  producers  J  at  any  time  that 
the  public  finds  such  a  measure  to  be  necessary  for  protection 
against  monopoly.  Here,  then,  we  find  no  natural  law  working 
resistlessly  towards  combination,  but  a  man-made  device  which 
can  be  regulated  as  public  policy  may  dictate. 

Again,  we  are  told  that  a  trust  can  produce  more  cheaply  than 
separate  concerns,  because  all  the  plants  utilized  can  be  run  at 
their  full  capacity;  whereas,  under  competition,  many  establish- 
ments can  be  kept  in  operation  but  a  part  of  the  time.  Two 
observations  may  be  made  concerning  this  claim.  First,  the 
extent  of  the  economies  thus  realized  is  grossly  exaggerated. 
The  whiskey  combination  furnishes  the  stock  illustration  em- 
ployed to  enforce  this  argument;2  and  we  are  told  that  this 
trust  was  able  to  close  all  but  twelve  out  of  the  eighty  constitu- 
ent plants,  and  yet  produce  almost  the  same  quantity  of  spirits 
that  formerly  had  been  put  upon  the  market.  But  the  distilling 
industry  is  a  highly  exceptional  case.  For  twenty-five  years 
prior  to  the  formation  of  the  trust  the  federal  tax  upon  whiskey 
had  been  so  manipulated  by  the  distillers  as  to  call  into'  the 
industry  enormously  excessive  investments  of  capital.  Com- 
petition, of  itself,  would  never  have  produced  conditions  even 
remotely  resembling  those  that  prevailed  in  this  business  from 
1865  to  iSS/.3  The  sugar  refining  industry  is  another  stock- 
illustration,  but  here,  it  is  conceded,4  the  tariff  had  given  an 
undue  stimulus  to  investments ;  and  the  same  thing  is  true, 
probably,  of  many,  if  not  most,  of  the  trusts  that  have  been 
able  to  close  up  a  considerable  number  of  plants.5  In  general, 


1  All  writers  recognize  that  patents  have  contributed  materially  to  the  establish- 
ment of  certain  monopolies.  See  the  case  of  the  American  Steel  and  Wire  Com- 
pany. Industrial  Commission,  I,  18.  Some  measure  of  reform  in  our  patent  laws 
is  favored  by  such  a  conservative  writer  as  J.  B.  Clark  and  by  some  <>f  those  who 
uphold  trusts.  See  Chicago  Conference,  408  ;  Jenks,  220,  221  ;  ('oilier,  201. 

-  See  Jenks,  Trust  Problem,  34  ;    von  Halle,  Trusts,  59,  66. 

3  These   facts  are  clearly  stated   by   Jenks   in  Political  Science  Quarterly,  IV,  297 


454  TRUSTS,   POOLS  AND   CORPORATIONS 

it  may  be  denied  that,  whenever  governmental  interference  has 
not  produced  unhealthy  and  abnormal  conditions,  competition 
has  led  to  such  absurdly  excessive  investments  as  is  commonly 
assumed.  We  must  concede,  however,  that  under  normal  con- 
ditions some  reduction  can  be  made  in  the  number  of  plants 
required  to  supply  the  market  at  ordinary  times ;  but  this  does 
not  dispose  of  the  matter.  If  a  trust  is  to  be  prepared  for  sup- 
plying the  market  promptly  in  times  of  rapidly  increasing 
demand,  it  is  necessary  that  some  surplus  productive  capacity 
must  exist  in  periods  of  stationary  or  decreasing  demand;  for, 
as  believers  in  the  tendency  to  monopoly  often  remind  us,  many 
months,  or  even  one  or  two  years,  are  required  for  the  con- 
struction of  new  plants.  When  this  fact  is  taken  into  account, 
the  case  will  stand  as  follows :  except  where  the  action  of 
government  has  produced  abnormal  conditions,  the  capacity 
of  competing  establishments  does  not  exceed  the  requirements 
of  the  market  to  any  such  degree  as  is  commonly  assumed ; 
even  a  trust  must  provide  for  periods  of  expanding  trade,  and 
this  fact  diminishes  materially  the  margin  for  saving  by  avoid- 
ing the  burden  of  idle  factories;  even  then,  not  all  rival  estab- 
lishments suffer  seriously  from  inability  to  find  continuous 
employment  for  their  plants,  so  that  probably  the  advantages 
secured  by  the  trust  are  of  consequence  only  when  the  least 
fortunate  or  least  efficient  independent  concerns  are  made  the 
basis  of  comparison.  In  those  cases,  however,  where  abnormal 
conditions  have  been  created  by  the  operation  of  our  tax  laws, 
we  need  entertain  no  surprise  at  the  appearance  of  consolidated 
companies.  But  in  the  future,  it  may  be  asserted,  this  particular 
force  will  not  prevent  rival  companies  from  competing  for  a 
share  of  an  increasing  trade. 

The  last  three  economies  relate  to  advantages  in  buying  mate- 
rials or  selling  products.  It  is  urged  that  a  combination  can 
purchase  its  raw  materials  more  cheaply  than  separate  con- 
cerns. This  would  probably  be  interesting  news  to  many  large 
companies  not  connected  with  trusts,  and  Professor  Ely  is 
undoubtedly  right  in  remarking  that  all  ability  in  bargaining  is 
not  controlled  b)  combinations.1  No  one  doubts  that  a  large 

1  Monopolies,  162,  163. 


TRUST    LITERATURE:    SURVEY   AND   CRITICISM      455 

company  can  often  secure  better  terms  than  a  small  establish- 
ment;  but  it  is  not  so  clear  that  every  trust  can  secure  supplies 
more  cheaply  than  large  independent  enterprises,  unless  it  is 
true  that  all  combinations  can  arbitrarily  depress  the  prices  of 
the  materials  which  they  conslime.  Undoubtedly,  this  has  been 
done  by  some  of  the  trusts,1  although  their  partisans  deny  it;2 
but  such  a  saving  represents  no  social  gain,  and  sometimes  it 
may  be  possible  for  would-be  competitors  to  profit  by  the 
depressed  condition  of  the  market  for  raw  materials.  We  do 
not  need  to  deny  that  any  combination  can  gain  an  advantage 
in  the  purchase  of  supplies,3  in  order  to  support  the  contention 
that  no  general  advantage  accrues  to  the  tru>ts  from  this  source. 
On  this  point  the  Bulletin  of  the  Department  of  Labor  shows 
that  a  majority  of  the  forty -one  combinations  investigated  "  did 
not  answer  this  question  specifically,"  while  the  representations 
made  by  the  minority  claimed  no  great  economy  in  purchases 
except  in  a  few  cases.  Even  when  considerable  savings  are 
realized,  it  is  always  possible  that  these  represent,  chiefly  or 
wholly,  gains  on  that  part  of  the  aggregate  purchases  which  was 
formerly  made  by  the  smaller  and  weaker  establishments  ;  so  that 
the  realizing  of  a  net  gain  does  not  establish  the  existence  of  an  ad- 
vantage over  the  largest  companies  that  entered  the  combination. 
And,  finally,  we  come  to  economies  in  advertising  and  in  so- 
liciting business,  where  the  wastes  of  competition  are  certainly 
serious  and  the  room  for  improvement  correspondingly  great. 
Those  who  deny  the  tendency  to  monopoly  generally  admit  that 
a  trust  can  have  a  material  advantage  here,4  while  those  who 
affirm  the  existence  of  such  a  tendency  evidently  realize  that 
their  case  is  strongest  at  this  point.0  Vet  an  opportunity  for 
saving  in  these  departments  does  not  always  exist,''  and  the  extent 

1  Industrial  Commission,  I,  17,  142;    Jonks,  155,  156;    v«  n  Halle,  70. 

2  Sec  C.untiin,  S2-S7;    I.)o<!d,  62,  76.      I>odd  claims  that  the  nil  combination  has 
raiteil  the  price  of  crude  oil. 

3  F<>r  an  instance,  see  Junks,  145,  146.  4  Fly,  I  ("17;    Nettleton,  64. 

•'  Jenks.  ('17,  dS;  (  '»lliiT,  37,  <>i.  l!oth  of  these  \\ritersadmit  that  the  cjains  of  com- 
hinati.'ii  are  rather  in  marketing  products  than  the  work  of  manufacture. 

'"•  lUilK  tin  of  IVparttm  nt  of  Labor,  \o.  20,  p.  67}.  Here  it  is  stated  that  several 
trusts  reported  that  there  was  no  saving  in  advertising,  while  one  combination 
reported  that  more,  was  spent. 


456  TRUSTS,   POOLS  AND   CORPORATIONS 

of  the  economy  is  easily  exaggerated  in  other  cases.  Mr.  Nettle- 
ton  is  right  when  he  says  : l  "  But  to  whatever  extent  the  trust- 
organizers  have  counted  on  practically  cancelling  expenditure 
for  these  two  items,  on  the  ground  that  buyers  will  be  obliged 
to  come  to  the  sole  manufacturers/they  are  likely  to  be  surprised. 
Those  trusts  that  have  tried  this  experiment  have  discovered  that 
demand  for  commodities  falls  off  with  remarkable  rapidity  as 
soon  as  effort  in  pushing  sales  is  materially  reduced.  To  an 
extent  which  few  appreciate,  the  buying  public  has  become 
accustomed  to  being  reminded  of  its  needs  before  making  pur- 
chases. The  country  merchant  often  has  more  inertia  than 
enterprise,  and,  with  the  periodical  visits  of  his  favorite  drummer 
discontinued,  his  orders  dwindle  or  are  delayed  until  unseason- 
able. Except  in  staple  and  absolutely  necessary  commodities, 
demand  is  largely  created  and  maintained  by  advertising  through 
periodicals,  catalogues  or  travelling  salesman.  Hence,  the 
trust  that  expects  to  save  the  bulk  of  this  important  item  must 
also  expect  to  lose  through  diminished  sales  more  than  the 
economy  represents.  This  is  not  theory,  but  the  testimony  of 
leading  dealers  in  many  lines."  Moreover,  those  who  believe 
in  the  permanence  of  competition  will  not  lose  sight  of  another 
consideration  which  is  advanced  by  Professor  Marshall,2  who 
writes  concerning  the  economies  accruing  from  these  sources : 
"  But  its  weakness  in  this  regard  lies  in  the  fact  that  to  keep  its 
monopoly  it  must  be  always  bargaining  and  manoeuvring  on  a 
large  scale.  And  if  its  monopoly  is  invaded,  it  must  bargain 
and  manoeuvre  widely  in  matters  of  detail  as  well  as  in  larger 
affairs." 

The  result  of  our  discussion  up  to  this  point  would  seem  to 
be  that  any  advantages  of  a  monopoly  over  independent  con- 
cerns of  a  large  size  are  but  slight,  except  in  the  single  matter 
of  effecting  sales.  We  must  now  take  into  account  certain 
counteracting  forces,  upon  which  some  writers  rest  their  belief 
that  competition  will  ultimately  prevail.  These  economists  con- 
tend, in  the  first  place,  that,  outside  the  field  of  the  natural 
monopolies,  the  growth  of  a  business  enterprise  is  limited  by 
the  fact  that  companies  of  a  certain  size  will  secure  "maximum 

1  Trusts,  64.  -  Marshall,  Some  Aspects  of  Competition,  24. 


TRUST   LITERATURE:    SURVEY  AND   CRITICISM      457 

efficiency  "  of  investment,  and  that  beyond  this  point  concen- 
tration brings  no  increase  in  productive  capacity.  Without 
introducing  the  arguments  of  professional  economists  upon  the 
subject,1  it  may  be  pointed  out  that  this  view  is  entertained  by 
many  men  who  have  a  practical  acquaintance  with  our  large 
manufacturing  industries.2  This  position  is  based  upon  the 
belief  that  a  factory  of  a  certain  size  will  enable  machinery  to 
be  employed  in  the  most  advantageous  manner ;  that  a  reason- 
able number  of  such  plants  will  make  possible  all  needful 
specialization  of  production  ;  that  allied  and  subsidiary  indus- 
tries can  be,  and  are,  carried  on  by  large  independent  concerns; 
and  that  the  cost  and  difficulties  of  supervision  increase  rapidly 
after  a  business  is  enlarged  beyond  a  certain  size,  especially 
when  it  is  attempted  to  unite  plants  situated  in  different  parts 
of  the  country.  For  this  reason,  increased  output  does  not 
decrease  the  burden  of  fixed  charges  after  a  company  attains 
a  certain  magnitude ; 3  but,  on  the  contrary,  new  charges  arise. 
Among  such  new  expenses,  not  the  least  important  are  the  cost 
of  employing  the  most  skilled  legal  talent  to  steer  the  combi- 
nation just  close  enough  to  the  law,  the  expenses  necessary  for 
"legislative"  and  "educational"  purposes,  and  the  outlays  for 
stifling  competition  or  the  continual  "  buying  out "  of  would-be 
rivals. 

Not  only  is  it  denied  that  consolidation  secures  no  decrease 
of  fixed  charges  over  independent  concerns  possessing  sufficient 
capital,  but  it  is  argued  that  an  established  monopoly  will  suffer 
actual  loss  from  listless  and  unprogressive  management.  As 
the  New  York  Journal  of  Commerce  rightly  insists,  "  it  is  not  to 
be  denied  that  such  concentrations  of  management  will  be  sub- 
ject to  countervailing  offsets  from  the  absence  of  the  stimulus 
of  competition ;  from  the  uncertainty  about  the  management 

1  See  Clark,  in  Chicago  Conference,  405;  Adams.  <=/>.  fit.,  37;  Ely,  165,  166; 
Uousiers,  281.  320;  Meade,  in  Auti,i/s,  XYf,  35;,.  See  also  Chicago  Conference,  620; 
Xettleton,  62,  63.  Even  Jenks  \vavers  at  this  [joint,  68. 

-  See  Studebaker,  in  Chicago  Conference,  575;  Mr.  Converse,  of  Baldwin  Loco- 
motive Works,  in  Springfield  J\,-fn/>/ifiin,  Dec.  20,  1900;  Messrs.  Doscher,  Post, 
Clarke,  Griffiths  and  Taylor,  in  Industrial  Commission,  68,  88,  18^;  Pillshury,  in 
Xettleton,  251. 

'  An  alleged  decrease  is  one  of  the  twenty  supposed  economies  of  combination. 


458  TRUSTS,   POOLS  AND   CORPORATIONS 

falling  into  the  best  possible  hands ;  from  the  discouragement 
to  invention  which  always  attends  monopoly ;  and  from  the 
possibility  that  the  administration  may  be  intrusted  to  '  friends  ' 
rather  than  to  experts."  And  the  existence  of  such  drawbacks 
is  admitted  by  many  of  those  who  believe  combination  to  be 
desirable  and  inevitable.1  As  Professor  Clark  suggests,  an 
established  monopoly,  secure  in  the  possession  of  the  markets 
of  a  large  country,  "  would  not  need  to  be  forever  pulling  out 
its  machines  and  putting  in  better,"  so  that,  as  compared  with 
countries  where  industry  is  upon  a  competitive  basis,  such  a 
combination  would  fall  behind  in  the  struggle  for  international 
trade.2  In  ruthlessly  and  unceasingly  displacing  the  expensive 
machinery  with  newer  and  better  appliances,  American  manu- 
facturers have  probably  led  the  world ;  but  monopolies  will 
inevitably  feel  reluctant  to  continue  such  an  energetic  policy  of 
improvement.  As  combinations  obtain  a  greater  age,  they 
will  persist  in  old  and  established  methods;3  while  nepotism 
and  favoritism,  tending  towards  hereditary  office-holding,4  will 
replace  the  energetic  management  that  some  of  the  trusts 
now  display.  Andrews  is  correct  in  holding  that  the  quest  for 
able  and  progressive  management,  which  often  marks  the  efforts 
of  existing  trusts  to  make  their  dominating  position  secure,  is 
no  argument  against  the  probability  of  future  apathy  when 
monopolies  have  been  long  established.5 

Here  we  may  refer  to  two  of  the  alleged  advantages  of  trusts. 
It  is  said  that  combinations  develop  abler  management  through 
the  opportunity  they  afford  for  a  specialization  of  skill  upon 
the  part  of  their  officials,0  and  that  efficiency  is  increased  by  a 

1  See  Andrews,  in  International  Journal  of  Ethics,  IV,  327,  328  ;  Iladley,  159  ; 
Collier,  124.  Sherwood  thinks  a  point  may  he  reached  where  monopoly  "tends 
to  prevent  improvement."  Yale  AVrvVr,',  VI FI,  367.  Ciunton  and  von  Halle  admit 
that,  if  complete  control  of  markets  could  he  secured,  this  would  be  the  result. 
('.Hilton's  Maga-Jnc,  XIX,  349;  Trusts,  68.  See  references  to  Jenks  and  Iladley  in 
subsequent  notes. 

-  (i  union'1  s  Maga:ine,  XIX,  210.      (  f.  rolitical  Science  (hctrterly,  XV,  184. 

;i  See  Hly,  167.      Note  Uadlcy,  in  Atlantic  Monthly,  LXXIX,  383. 

4  See  admission  of  Jenks,  in  Quarterly  Journal  of  Economics,  XV,  51-53- 

•"'  International  Journal  of  Ethics,  1  V,  327,  328. 

''  |enks,  Trust  Problem,  36,  37  ;    Quarterly  Journal  of  Economics,  XV,  51. 


TRUST   LITERATURE:    SURVEY   AND   CRITICISM      459 

comparison  of  the  methods  and  costs  of  production  in  the  vari- 
ous plants.1  The  first  of  these  advantages  may  be  open  to 
question,  since  it  is  not  clear  that  large  independent  concerns 
do  not  afford  sufficient  room  for  specialization  of  talent;  while 
it  may  be  denied  that,  in  the  long  run,  any  possible  gain  from 
this  source  will  suffice  to  counterbalance  the  apathy  begotten  by 
monopoly.  Concerning  the  second  it  may  be  remarked  that,  at 
the  outset,  this  gain  would  accrue  only  to  the  least  efficient 
plants,  and  would  not  make  the  combination  superior  to  the 
best  of  the  original  establishments;  while,  after  a  time,  although 
all  the  factories  might  be  brought  up  to  the  same  level,  the  lack 
of  competition  would  retard  the  rate  of  future  improvement. 

When  it  is  contended  that  the  "  strength  of  the  trust  is  that 
it  gives  the  opportunity  for  the  exercise  of  these  highest  quali- 
ties of  industrial  leadership,"  and  that  it  gives  us  "a  process  of 
natural  selection  of  the  very  highest  order,"2  we  may  question 
whether  stock  speculation  and  other  causes  lying  outside  the 
sphere  of  mere  productive  efficiency  have  not  had  more  to  do 
with  the  formation  of  recent  combinations  than  demonstrated 
superiority  in  business  management.  And,  even  if  it  be  ad- 
mitted that  dominating  powers  of  leadership  have  played  their 
part  in  the  movement,  it  may  be  asserted  that  the  establishment 
of  permanent  monopoly3  will  interfere  seriously  with  the  future 
process  of  selection.  Professor  Lindsay  has  remarked  very 
justly 4  that  the  "development  of  a  high  order  of  undertaking 
genius  in  the  few  seems  ...  to  depend  upon  a  wide  range  of 
undertaking  experience  in  the  many,"  and  that  under  a  regime 
of  trusts  "  we  would  in  the  course  of  a  few  generations  have 
very  little  available  material  from  which  to  make  selections." 
It  must  be  remembered  that  the  able  leaders  now  at  the  head  of 
the  successful  trusts  were  developed  out  of  a  field  which  afforded 
the  widest  opportunity  for  creative  ability  and  independent 


460  TRUSTS,   POOLS  AND   CORPORATIONS 

initiative.  These  are  the  supreme  qualities  requisite  for  great 
industrial  leadership;  and  they  are  not  likely  to  be  fostered  by 
a  regime  which,  if  the  believers  in  monopoly  are  to  be  taken  at 
their  word,  closes  each  important  branch  of  manufactures  to 
new  enterprise,  and  renders  hopeless  all  competition  .  with  a 
single  consolidated  company.  Will  successive  generations  of 
bureau  chiefs  or  heads  of  departments  in  long-established  cor- 
porations be  able  to  continue  the  race  of  masterful  leaders, 
which  freedom  in  originating  and  organizing  independent  indus- 
tries has  given  us  in  the  present  age  ? 

This  leads  to  another  consideration.  In  an  industry  organ- 
ized upon  a  national  scale,  under  the  control  of  a  single  com- 
pany, there  must  arise  an  "irrepressible  conflict"  between  that 
central  responsibility  necessary  for  intelligent,  unified  manage- 
ment and  that  individual  freedom  and  energy  requisite  for  the 
healthful  life  of  the  separate  members.1  For  centralized  con- 
trol, elaborate  and  costly  administrative  apparatus  is  absolutely 
essential;  and  this  mechanism  of  superintendence  soon  becomes 
fixed  and  bureaucratic  in  its  methods,  so  that  it  bears  heavily 
upon  the  individual  parts.  President  Hadley  has  said  recently 
that,  as  trusts  gain  in  age  and  experience,  good  private  business 
will  become  so  similar  to  good  public  business  that  it  will  make 
little  difference  whether  an  enterprise  is  carried  on  by  the  pub- 
lic or  by  individuals.2  In  one  respect,  at  least,  his  argument  is 
well  founded.  Governmental  enterprises  usually  suffer,  at  least 
when  conducted  upon  an  extensive  scale,  from  the  lack  of  that 
stimulus  which  only  competition  can  give  and  from  the  growth 
of  fixed  bureaucratic  methods  of  control.  A  private  monopoly 
that  engrosses  an  entire  branch  of  industry  must  develop  inevi- 
tably, in  the  course  of  time,  the  very  characteristics  that  impair 
the  efficiency  of  a  public  undertaking.3  Both  will  exhibit  the 
tendency  to  unprogressive  management  which  comes  from  the 

J  This  has  been  pointed  out  by  IVufessnr  Marshall,  Some  Aspects  of  Competition, 

17- 

2  Scri/'iier's  M'n^nzine,  XXVI.  610. 

"President  Andrews  confronts  this  question  squarely  when  he  says,  "In  this 
important  regard  the  system  of  trusts  is  obnoxious  to  the  same  criticism  nearly 
always  made  against  socialism."  International  Journal  of  Ethics,  IN',  328. 


TRUST   LITERATURE:    SURVEY   AND   CRITICISM      461 

absence  of  competition1  and  the  weight  of  centralized  adminis- 
trative machinery. 

When  all  the  arguments  are  sifted,  and  the  balance  of  advan- 
tage or  disadvantage  is  determined,  there  is  reason  for  thinking 
that  the  losses  due  to  monopoly  will  more  than  offset  occasional 
slight  gains  in  the  work  of  manufacture  and  the  more  substantial 
savings  in  placing  products  upon  the  market.  This  conclusion 
is  strengthened  by  the  showing  which  most  of  the  trusts  have 
made  in  the  payment  of  dividends  upon  their  securities.  As  is 
well  known,  the  preferred  shares  have  usually  represented  the 
amount  paid  in  cash  or  securities  for  the  plants  that  have  been 
purchased  and  for  the  working  capital  supplied  by  the  financier. 
The  common  stock  represented  nothing  more  than  "  the  sub- 
stance of  things  hoped  for  "  in  the  way  of  alleged  economies 
of  operation.  Although  times  have  been  unusually  prosperous, 
and  prices,  already  high,  have  often  been  increased  by  the  trusts, 
dividends  on  the  common  stock  have  almost  universally  disap- 
pointed the  expectations  of  those  who  invested  with  the  hope  of 
securing  a  part  of  the  "enormous"  savings  of  combination.2 

V 

The  second  argument  advanced  to  prove  the  tendency  to 
monopoly  is  the  claim  that  mere  mass  of  capital  confers  such 
powers  of  destructive  warfare  as  to  deter  possible  competitors 
from  entering  the  industry,  at  least  until  prices  have  long  been 
held  above  the  competitive  rate.  It  is  said  that  a  large  com- 
bination can  lower  prices  below  the  cost  of  production  in  any 

1  The  writer  does  not  overlook  the  fact  that  believers  in  monopoly  contend  that 
potential  competition  survives  the  formation  of  trusts.  But  in  subsequent  paragraphs 
it  will  be  shown  that,  if  the  arguments  advanced  to  prove  the  superior  efficiency  of 
trusts  are  sound,  competition  cannot  continue  in  any  f  inn. 

-  Another  consideration  hearing  upon  this  question  of  the  efficiency  of  trusts  is  the 
fact  that  they  have,  in  order  to  obtain  control  of  their  industries,  bought  up  large 
numbers  of  antiquated  or  badly  situated  plants  which  will  be  a  permanent  burden. 
See  Collier,  67,  (>8  ;  von  Halle,  61  ;  Jenks,  195-197;  Trust  Conference,  Wj  :  Ci'/i- 
tury  M,ig<i:i>u\  I.X,  148  ;  Xettleton,  250.  In  cases  where  plants  are  paid  for  by  issues 
of  preferred  stock,  as  has  usually  been  the  case,  the  sums  paid  for  worthless  factories 
will  affect  dividends,  but  not  linancial  solvency.  Where  bonds  have  been  issued, 
however,  then  the  burden  will  become  more  serious. 


462 

locality  where  a  small  rival  concern  is  established,  thus  driving 
it  out  of  the  field.  If,  on  the  other  hand,  a  large  rival  company 
attempts  to  compete  in  all  markets,  this  will  mean  an  investment, 
of  capital  in  excess  of  the  needs  of  trade,  with  a  consequent 
depression  of  business  and  loss  to  all  concerned.1  Without 
doubt  the  destructive  competition  waged  by  combinations  is 
an  important  consideration,  and  it  may  well  enough  reenforce 
monopoly  where  other  attendant  circumstances  favor  consolida- 
tion.2 But  a  monopoly  based  solely  upon  this  power  would  be, 
confessedly,  a  temporary  affair ;  for  probably  no  one  would  claim 
that  all  capitalists  would  be  intimidated  permanently  by  such 
circumstances.  This  argument,  therefore,  may  be  used  properly 
enough  to  strengthen  the  conclusions  drawn  from  the  alleged 
economies  in  production  ;  but  it  does  not  of  itself  establish  the 
existence  of  a  permanent  tendency  to  monopoly.  Of  this  truth, 
any  one  who  observes  the  trouble  which  trusts  are  having  with 
new  enterprises  at  the  present  moment  may  obtain  sufficient 
evidence.3 

It  should  not  be  forgotten,  furthermore,  that  this  argument 
depends  upon  the  fact  that  combinations  at  present  are  allowed 
to  employ  the  weapons  of  discriminating  prices  and  other  tactics, 
which  violate  every  one's  sense  of  fair  play  although  they  may 
be  difficult  to  suppress.  If  uniform  price  lists  could  be  made 
obligatory,  then  this  power  of  intimidating  rivals  would  largely 
disappear ;  for,  if  a  trust  must  give  its  products  away  in  all 
markets  in  order  to  ruin  a  competitor  who  enters  a  portion  of 
the  field,  then  its  losses  would  be  proportionate  to  the  mass  of 
capital,  and  the  advantage  over  the  independent  concern  would 
disappear.4  Without  doubt  the  prevention  of  price  discrimina- 

1  Jenks,  66,  67  ;  Forrest,  in  American  Journal  of  Sociology,  V,  241  ;  Collier,  129  ; 
Baker,  350,  351. 

-  This  is  admitted  by  Ely,  178. 

3  One  illustration  from  an  earlier  period  may  be  cited.      At  the  opening  of  1892 
it  is  said  that  the  lead  trust  owned  all  the  establishments  in  the  country  except  two. 
In    iS()4,  however,  there  were  in  existence  independent  plants  producing  as  large  a 
product  as  the  trust.     The  trust  had  a  capitalization  of  830,000,000,  the  independent 
companies  employed  a  capital  of  $2, 000,000.     See  Popular  Science  Monthly,  XLIY, 
741,  742.      More  recent  illustrations  will  be  presented  later. 

4  This  is  urged  by  Clark  in  Political  Science  Quarterly,  XV,  194. 


TRUST    LITERATURE:    SURVEY  AND   CRITICISM      463 

tions  would  be  a  work  of  great  difficulty  ;  but,  if  this  must  be 
done  in  order  to  prevent  the  abuses  of  monopoly,  then  some 
way  of  accomplishing  the  result  can  and  will  be  found.  Such 
a  remedy  will  be  less  difficult  than  the  elaborate  schemes  which 
those  who  believe  in  trusts  advocate  in  order  to  remove  admitted 
abuses  in  other  directions.  The  menace  of  mere  mass  of  capital 
is  at  the  most  a  cause  of  temporary  monopoly,  and  its  potency 
can  be  destroyed  by  depriving  the  trusts  of  their  favorite  method 
of  "  sand-bagging  "  competitors. 

VI 

The  final  reason  for  the  belief  that  combinations  must  ulti- 
mately prevail  is  found  in  the  character  of  modern  competition 
in  those  industries  which  require  heavy  investments  of  fixed 
capital.  Under  such  conditions  the  difficulty  of  withdrawing 
specialized  investments  and  the  losses  that  are  entailed  by  a  sus- 
pension of  production  make  competition  so  intense  that  prices 
may  be  forced  far  below  a  profitable  level  without  decreasing  the 
output;  and  industrial  depression  inevitably  follows.1  For  such 
constant  fluctuations  in  prices,  combination  is  considered  the 
natural  and  inevitable  remedy.  Some  writers  allege,  further- 
more, that  it  "  is  not  possible  to  have  competition  without  com- 
petitors, and,  if  there  be  competitors,  one  must  prevail,"  so  that 
monopoly  "is  the  inevitable  fruit  of  competition."2 

The  socialist  who  reads  some  of  these  arguments  must  feel  that 
at  last  many  of  the  criticisms  which  he  has  long  urged  against 
competition  have  been  accepted  by  economists  of  the  orthodox 
type.  Certainly,  few  stronger  indictments  of  the  competitive 
regime  have  been  formulated  by  socialistic  critics  of  the  existing 
social  order.  Thus  the  believers  in  trusts  tell  us  that  "  individ- 

1  Tenks,  16-20,  I<)0,  200;  Anio-ican  Jo ui'nal  of  Sods'.cgy,  V,  232,  233  ;  Interna- 
tional /ourn'il  </  I-'.tliics,  IV,  322,  323;  l\>nc/n,  XXVIII,  414,  415;  Hadley,  158. 
150;  /'/  t^-r,-ss.  V,  iS  ;  (.'oilier.  43. 

-  C'ochran.  in  Chicago  Conference,  476  ;  Collier,  40.  Since  the  existence  of  abso- 
lutely uni']iu.-  undertaking  ability  maybe  saf<  lv  denied,  this  particular  allegation  may 
be  di>mi»ed  \\ith  the  single  comment  that,  \\hilc  leaders  of  remarkable  talents  may 
temporarily  secure  a  dominating  position,  permanent  monopoly  can  never  be  estab- 
li>hed  ujioii  such  a  IMMS  as  thi>. 


464  TRUSTS,   POOLS  AND   CORPORATIONS 

ualism  and  the  competitive  system  have  run  their  course  "  ;  that 
"  the  competitive  system  of  industry  is  fast  passing  away  "  ;  that 
competition  is  "inadequate  and  wasteful,"  resulting  in  "general 
depression  "  and  "  industrial  loss  "  ;  that  the  competitive  regime 
leads  to  warfare  that  is  first  "intense,"  then  "destructive," 
then  "  self -destructive  ";  that  competition  is  not  the  "life,"  but 
"the  death  of  trade"  and  "a  destroying  force  to  those  engaged 
in  it,"  so  that  it  is  termed  "business  committing  suicide."  1  Pro- 
fessor Ely  remarks,  justly  enough,  that  such  contentions  are  "a 
virtual  surrender  to  the  theory  of  socialism."2  In  any  event,  the 
reader  will  perceive  that  it  is  idle  for  economists  who  hold  these 
views  to  imagine  that  their  theories  do  not  lead  to  the  conclusion 
that  competition  is  impossible  and  permanent  monopoly  inevita- 
ble in  the  industries  to  which  the  discussion  relates. 

In  continuation  of  this  line  of  argument,  it  is  said  that  trusts 
are  beneficial,  because  they  can  "  exercise  a  rational  control  over 
industry,"  and  "  adjust  production  to  consumption."3  Thus  it  is 
believed  that  commercial  crises  can  be  prevented,  or,  at  least, 
that  their  worst  effects  can  be  avoided.4  But  such  arguments 
overlook  the  facts  that  a  restriction  placed  upon  production  by  a 
trust,  especially  if  this  is  sufficient  to  raise  prices  above  the  com- 
petitive rate,  may  react  injuriously  upon  other  trades;5  and  that 
monopoly  profits,  accruing  to  a  small  body  of  capitalists  for  a 
long  period  of  time,  must  constitute  a  tax  upon  the  body  of  the 
people  that  will  affect  the  distribution  of  wealth  in  such  a  way 
as  to  reduce  the  consuming  power  of  the  masses.6  A  reduction 

1  For  these  references  in  order  see  Independent,  XLIX,  273  ;  International  Jour- 
nal if  Ethics,  iv,  321  ;  Xettleton,  36  ;  Jenks,  199,  212,  213  ;  Collier,  43  ;  Progress,  V, 
18;  Chicago  Conference,  288  ;  Collier,  55. 

'2  Monopolies,  1 68. 

3  Guntun,  77,  78,  254,  255  ;  Chicago  Conference,  58,  69,  550;  Apthorp.  25  ;  Collier, 
73;  International  Journal  of  Rthics,  IV,  3,1  ;    Hadley,  in  Scribner's,  XXVI,  606. 

4  I  shall  pass  over  without  comment  such  statements  as  "  With  a  consuming  power 
of  75,000,000,  we  have  a  producing  power  of  150,000,000,"  and  the  like.     Thurber, 
in  Arena,  XXII,  310.     Cf.  Collier,  71. 

&  Xote  Marshall,  Some  Aspects  of  Competition,  24  ;  Adams,  in  Chicago  Confer- 
ence, 37  ;  also  Bemis,  op.  cit.,  398. 

'•  Even  if  trusts  do  not  reduce  nominal  rates  of  wages,  —  as  we  are  told  they  will 
not,  —  such  a  tax  would  result  frum  holding  prices  above  the  competitive  rate;  for 
this  would  diminish  real  wages  and  decrease  purchasing  power. 


TRUST   LITERATURE:   SURVEY   AND   CRITICISM      465 

in  purchasing  power  thus  produced  would  render  excessive  the 
existing  investments  in  staple  industries,  and  produce  crises  in 
precisely  the  manner  described  by  Rodbertus  and  Marx.  It  will 
probably  be  wise,  in  any  case,  to  postpone  a  final  conclusion 
upon  this  subject  until  we  know  the  ultimate  consequences  of  the 
present  depression  in  Germany,  —  a  country  whose  industries  are 
to  a  large  extent  "  regulated  "  by  various  combinations.  And  it 
remains  to  be  seen  how  our  own  trusts  will  deal  with  the  almost 
inevitable  reaction  from  the  intense  speculative  activity  of  recent 
years  in  the  United  States.  If  trusts  are  unable  to  destroy  the 
competition  that  is  now  disturbing  the  serenity  of  their  managers, 
and  must  meet  with  continual  interference  from  "interlopers," 
it  may  turn  out  that  combinations  professing  ability  to  secure 
large  profits  on  excessive  capitalization  are  such  a  tempting  mark 
for  rival  capital  that  our  new  remedy  for  industrial  depression 
will  merely  intensify  the  evils  which  it  was  designed  to  cure. 

Not  only  is  it  doubtful  whether  monopoly  is  a  wise  method  of 
regulating  industry,  but  it  is  certain  that  the  evils  of  competition 
are  greatly  exaggerated  in  some  cases,1  while  in  others  they  are 
due  to  unhealthful  conditions  for  which  an  interference  with 
industrial  freedom  is  responsible.  Mention  has  already  been 
made  of  the  distilling  industry,  which  has  served  as  a  typical 
example  of  the  evils  of  competition  and  the  benefits  of  combina- 
tion. Here  all  will  admit  that  excessive  investment  was  due  to 
the  unwise  action  of  Congress  in  changing  the  rate  of  taxation 
in  such  a  manner  as  to  benefit  the  distillers,  and  to  lax  enforce- 
ment of  the  revenue  laws,  which  enabled  those  who  evaded  the 
exciseman  to  realize  a  profit  of  several  hundred  per  cent.  In 
this  case,  depression  was  not  due  to  mere  competition  ;  and, 

1  While  business  depression  is  commonly  assigned  as  the  cause  of  combination 
(see  Industrial  Commission,  I,  214,  part  2,  21,  109,  ibS,  169,  2^5,  Sii),  especially  by 
trust  magnates,  it  is  certain  that  the  large  majority  of  our  present  trusts  were  formed 
in  a  period  of  unusual  prosperity,  when  the  stock  market  offered  an  opportunity  for 
large  speculative  gains.  Kven  when  depression  is  known  to  have  been  a  cause  of 
consolidation,  sometimes  not  all  the  companies,  but  only  the  weaker  ones,  were  losing 
money.  See  Yale  Keri-'u1.  VIII,  157  ;  Annals,  XVI,  3^5  ;  Industrial  Commission,  I, 
176.  It  is  notorious  that  it  has  been  the  weaker  plants  that  were  most  anxious  for 
combination,  while  the  better  concerns  could  be  induced  to  join,  in  many  cases,  only 
by  the  olter  of  excessive  prices  for  their  factories.  Note  ( 'oll'-.-r,  208,  209. 


466  TRUSTS,   POOLS  AND   CORPORATIONS 

moreover,  the  formation  of  pools,  and  finally  a  trust,  served 
merely  to  call  more  capital  into  the  industry  and  to  intensify  the 
evils.1 

In  many  other  industries  where  trusts  have  been  formed,  the 
excessive  investment  of  which  writers  complain  was  caused  by 
the  undue  stimulus  given  by  high  protective  duties  and  by 
the  restriction  of  foreign  competition.  Upon  over-investments 
caused  by  increases  in  the  tariff,  enough  has  been  said  in  a  pre- 
vious paragraph ;  but  the  second  topic  requires  further  explana- 
tion. The  iron  and  steel  industries  are  the  best  illustration  of 
the  periodic  fluctuations  of  prices,  of  which  the  believers  in 
trusts  complain ;  and  Professor  Taussig  has  recently  demon- 
strated that  these  phenomena  are  greatly  intensified  by  the 
operation  of  our  tariff.2  He  shows  that  in  times  of  rising 
prices  the  restriction  of  importation  has  thrown  upon  domestic 
producers  nearly  the  whole  work  of  supplying  the  expanding 
market.  Since  new  plants  cannot  be  erected  in  a  short  time, 
prices  increase  enormously  before  domestic  production  equals 
the  demand.  These  high  prices  cause  excessive  investment, 
and  hasten  a  reaction  which  results  in  a  consequent  period  of 
depression.  During  the  recent  "boom  "  in  the  iron  markets  of 
the  world,  English  prices  rose  from  $9.80  to  $16.70  per  ton  for 
one  grade  of  pig  iron,  and  from  $i  1.70  to  $18.60  for  another,  an 
increase  of  70  per  cent  for  the  first  kind  and  59  per  cent  for 
the  second.  At  the  same  time  American  prices  rose  from  $10.00 
to  $25.00  per  ton,  an  increase  of  150  per  cent,  so  that  the  ab- 
sence of  foreign  competition  made  the  fluctuations  more  than 
twice  as  great  as  they  were  in  the  English  market.  This,  he 
adds,  "is  but  an  illustration  of  the  simple  principle  that,  the 
wider  the  range  of  the  sources  of  supply,  the  greater  the  steadi- 
ness of  prices."  When  Mr.  Carnegie  complains,3  therefore,  of 
the  alternating  periods  of  expansion  and  depression  that  beset 
the  iron  industry,  he  merely  emphasizes  the  connection  between 
our  protective  tariff  and  the  intensification  of  the  causes  that 

1  This  is  conceded  by  Jenks,  Trust  Problem,  149  ;  Political  Science  Quarterly,  IV, 

3H- 

-  Quarterly  Jo^trnal  of  Economics,  XIV,  479-484. 
'•'  Century  Magazine,  LX,  147. 


TRUST   LITERATURE:   SURVEY  AND   CRITICISM    467 

are  alleged  to  produce  trusts.  Since  the  range  of  our  protected 
industries  is  so  great,  the  importance  of  the  considerations  just 
presented  can  hardly  be  overestimated.  Competition  is  restricted 
by  protective  duties  in  most  of  the  industries  where  combinations 
are  formed ;  these  duties  increase  the  severity,  and  perhaps  the 
frequency,  of  the  fluctuations  from  which  business  suffers;  then 
trusts,  a  further  restriction  of  freedom,  are  advocated  as  a  rem- 
edy for  the  ills  caused  by  the  initial  interference  with  individual 
enterprise ;  and,  finally,  in  order  to  regulate  the  trusts,  an  elabo- 
rate system  of  public  supervision  is  proposed.  Would  it  not  be 
well  to  make  a  genuine  trial  of  competition  before  condemning 
it  for  producing  evils  which  are  greatly  increased  by  governmen- 
tal interference  with  industrial  freedom  ? 

Competition  cannot  be  proved  a  failure  until  it  is  given  a  trial. 
The  evils  from  which  many  economists  would  seek  refuge  in 
industrial  combination  are  greatly  increased  by  unwise  laws 
which  have  now  outlived  any  usefulness  that  originally  they  may 
have  possessed.  If  unhealthful  conditions  produced  by  our  own 
interference  with  the  course  of  business  are  ever  removed,  com- 
petition will  probably  develop  no  evils  which  could  not  be  borne, 
as  vastly  preferable  to  monopoly,  public  or  private.  Indeed, 
even  as  things  are,  the  shortcomings  of  the  competitive  system 
are  exaggerated ;  and  attempted  monopoly  is  more  likely  in  the 
end  to  increase,  rather  than  mitigate,  those  periodic  fluctuations 
from  which  industry  suffers. 

VII 

Monopoly  is  not  a  pleasant  word,  and  believers  in  the  waste- 
ful and  destructive  character  of  competition  prefer  to  speak  of 
trusts  as  combinations  ;  or,  when  they  use  the  term  "  monopoly," 
hasten  to  explain  that  this  does  not  imply  the  absence  of  all 
competition.  Thus  it  is  said1  that  either  actual  or  potential 
competition  will  oblige  the  trusts  to  share  with  the  public  the 
savings  arising  from  consolidation,  and  will  protect  the  consumer 

1  See  Iladley,  161-163  ;  Jcnks,  224;  Apthorp,  n;  Gunton,  24,  25,  193-196; 
G teuton's  .}fti£<izine,  XIX,  349-351  ;  /'regress,  V .  :;<)  ;  Industrial  Cummission,  I,  200. 
Tliis  list  of  citations  could  be  extended  almost  indefinitely. 


468  TRUSTS,   POOLS  AND   CORPORATIONS 

from  serious  injury.  Since  this  argument  has  been  allowed  hith- 
erto to  pass  without  serious  criticism,  the  reader  is  asked  to  give 
it  a  moment's  consideration. 

When  Professor  Clark  says  that  the  actual  investment  of  new 
capital  is  not  always  necessary  in  order  to  restrain  the  power  of 
a  combination  to  raise  prices,  because  the  mere  possibility  of 
rivals  entering  the  field  may  suffice,1  his  argument  is  not  incon- 
sistent or  absurd,  because  he  does  not  believe  that  a  monopoly 
is  a  more  efficient  agent  of  production  than  a  large  independent 
concern,  or  that  the  competitive  regime  is  necessarily  destructive 
and  suicidal.  And,  when  he  shows  that  this  "potential"  com- 
petition of  new  capital  can  be  made  more  effective  by  abolishing 
railroad  discriminations  and  discriminating  prices,  he  makes  a 
distinct  contribution  to  the  discussion  of  the  trust  problem.  But 
no  such  argument  can  come,  without  manifest  inconsistency, 
from  economists  who  believe  that  a  trust  is  superior  to  indepen- 
dent companies.  The  gulf  between  permanent  monopoly  and 
competition  cannot  be  bridged,  even  by  appealing  to  such  a 
subtle  agency  as  potential  competition. 

In  the  first  place,  competition,  actual  or  potential,  could  not 
distribute  among  consumers  more  than  the  most  infinitesimal 
share  of  the  alleged  economies  of  monopoly.  The  reader  will 
remember  that  the  advocates  of  combination  consider  that  it  is 
proved  that  a  single  company  can  produce  and  market  commodi- 
ties at  a  much  lower  cost  than  independent  concerns.  If  this 
be  true,  we  may  assume  that,  if  the  lowest  price  at  which  an 
independent  company  can  afford  to  sell  a  commodity  be  one 
dollar,  a  combination  can  afford  to  sell  for  still  less,  say  eighty 
cents,  and  that  the  difference  of  twenty  cents  represents  the 
savings  effected  by  monopoly.  Now  it  is  evident  that  compe- 
tition can  never,  except  for  relatively  short  periods  when  the 
market  is  overstocked,  reduce  the  price  below  one  dollar,  and 
that  producers  will  never  enter  the  field  unless  they  hope  to  be 
able  to  secure  at  least  these  figures.  A  monopoly,  therefore, 
can  maintain  the  price  at  ninety-nine  and  nine-tenths  cents  with- 
out inviting  competition ;  and  the  public  cannot  hope  to  secure 
more  than  the  most  insignificant  fraction  of  the  savings  due  to 

1  Chicago  Conference,  407-409;    Political  Science  Quarterly,  XV,  186. 


TRUST   LITERATURE:    SURVEY   AND    CRITICISM     469 

consolidation.  Competition,  manifestly,  can  do  no  more  than 
prevent  prices  from  rising  as  high  as  one  dollar.  Competitors 
might,  at  the  outset,  enter  the  industry  under  a  misapprehension 
of  the  situation  ;  but  it  would  soon  be  demonstrated  that  a  price 
just  under  one  dollar  would  make  competition  hopeless.  If, 
moreover,  as  is  alleged,  mere  mass  of  capital  tends  to  deter 
competition  until  prices  are  raised  somewhat  above  the  com- 
petitive point,1  this  argument  becomes  still  stronger ;  and  it 
would  seem  that  the  monopoly  might  charge  even  one  dollar 
without  holding  out  sufficient  inducements  to  possible  rivals. 
Thus  the  whole  saving,  and  possibly  something  more,  would 
go  to  the  combination. 

Secondly,  even  if  competition  could  hold  monopolistic  power 
in  check,  the  remedy  would  be  wasteful  and  uneconomic,  and 
would  mark  a  return  to  the  very  evils  which  combination  is 
supposed  to  cure.  The  argument  for  monopoly  is  based  upon 
the  claim  that  competition  is  wasteful,  destructive  and  produc- 
tive of  all  the  evils  in  the  calendar.  To  remedy  the  evils  of 
competition,  it  is  proposed  to  resort  to  combination  :  then,  to 
cure  the  wrongs  of  monopoly,  it  is  argued  that  we  can  return 
to  competition.  Indeed,  the  evils  of  renewed  competition  after 
monopoly  has  once  been  established  are  more  intense,  since  the 
chances  are  that  the  high  profits  of  the  combination  will  call 
too  much  capital  into  the  field  ;  so  that  the  last  state  of  the 
industry  that  has  been  regulated  "  rationally "  and  "  scientifi- 
cally "  by  a  single  company  will  be  worse  than  the  first.  More- 
over, if  combination  possesses  all  the  advantages  that  are  claimed 
for  it,  wise  public  policy  would  necessitate  the  adoption  of  some 
method  of  preventing  waste  from  the  useless  duplication  of 
manufacturing  plants.  In  public  service  industries,  where  all 
people  have  become  convinced  that  competition  does  result 
disastrously  both  to  producer  and  consumer,  such  a  restrictive 
policy  has  been  followed.  We  no  longer  think  of  paralleling 
existing  lines  of  railroad  in  order  to  remedy  the  evils  of  extor- 
tion, and  few  cities  will  in  the  future  permit  their  streets  to  be 
torn  up  in  order  to  install  unnecessary  gas  or  water  mains.  If, 
in  manufacturing  business,  consolidation  has  all,  or  nearly  all, 
1  This  is  argued  by  Jenks,  65-68;  Collier,  126-128. 


4/0  TRUSTS,   POOLS  AND   CORPORATIONS 

of  the  advantages  which  it  possesses  in  the  railway,  gas  or 
water  industries,  public  policy  will  dictate  that  the  evil  results 
of  competition  be  recognized  and  that  future  waste  of  capital 
in  rival  establishments  be  prevented.  The  arguments  in  favor 
of  combination  suffer  from  a  superabundance  of  proof  that  mo- 
nopoly is  more  efficient  in  production  and  more  healthful  and 
rational  in  seeking  for  public  favor.  Those  who  accept  these 
arguments  as  correct  should  carry  them  to  their  logical  conclu- 
sion, and  admit  that  competition  is  an  undesirable  remedy  for 
whatever  evils  monopoly  may  develop,1  and  that  public  regu- 
lation is  the  only  available  method  of  correction  short  of 
socialism. 

Finally,  it  should  be  remarked  that  competition  is  not  only 
an  undesirable,  but  an  impossible  remedy,  if  the  tendency  to 
monopoly  is  as  strong  as  represented.  If  competition  with  con- 
solidated concerns  is  hopeless  on  account  of  advantages  in  pro- 
ducing and  marketing  goods,  capital  will  soon  find  this  out,  and 
refrain  from  further  meddling  with  enterprises  that  are  fore- 
doomed to  failure.  If  the  business  world  becomes  convinced 
that  competition  inevitably  leads  to  suicidal  warfare  when  large 
investments  of  capital  are  involved,  then  public  opinion  or  posi- 
tive restraints  of  law  will  demand  that  further  criminal  waste 
of  capital  and  energy  shall  cease.  Potential  competition  will 
lose  all  of  its  virtue  when  the  futility  and  folly  of  actual  compe- 
tition are  once  forced  upon  the  convictions  of  those  who  possess 
capital ;  and,  when  this  happens,  the  monopolist  will  soon  forget 
that  the  danger  of  rivalry  ever  existed.  If  experience  ever  dem- 
onstrates that  the  arguments  of  many  economists  are  correct, 
then  we  shall  be  confronted  by  the  grim  fact  that  competition 
is  dead  and  that  monopoly  is  inevitable  in  most  important 
branches  of  manufacturing  industry.  Remedy  there  will  be 
none,  save  public  ownership  or  public  regulation;  and  past 
experience  raises  uncomfortable  doubts  whether,  under  the 
second  method,  the  government  or  the  trusts  would  be  the 
regulating  power. 


1  So  far  as  T  am  aware,  Mr.  Baker  is  the  only  writer  who  accepts  the  results  of  his 

own  logic.     Monopolies,  204,  205. 


TRUST   LITERATURE:    SURVEY   AND   CRITICISM     471 


VIII 

The  reader  will  have  observed  that  most  of  the  questions 
raised  by  this  survey  of  trust  literature  do  not  admit  of  the 
application  of  precise  methods  of  determination,  and  that  all 
that  can  be  done  is  to  weigh  opposing  forces  and  form  a  rough 
estimate,  based  upon  general  impressions  oftener  than  exact 
measurement,  of  the  relative  strength  of  the  advantages  and 
disadvantages  of  consolidation.  While  conclusions  thus  reached 
fall  far  short  of  certainty,  and  prediction  is  dangerous,  this  is 
due  to  the  fact  that  data  for  a  more  exact  investigation  are 
denied  to  economists,  who  can,  at  the  best,  secure  but  occasional 
glimpses  into  the  inner  workings  of  great  business  corporations 
or  draw  what  inferences  seem  warranted  by  the  facts  that  come 
to  the  attention  of  the  public.  This  examination  of  the  recent 
drift  of  opinion  concerning  trusts  would  seem  to  have  established 
only  two  conclusions :  first,  it  will  be  wise  to  maintain  a  posi- 
tion of  scepticism  concerning  the  alleged  advantages  of  com- 
binations ;  and,  secondly,  it  is  very  important  to  notice  that  the 
alleged  tendency  to  permanent  monopoly  is  irreconcilable  with 
the  continuation  of  anything  that  properly  can  be  called  compe- 
tition. 

If  we  adopt  the  conclusion  that  it  is  improbable  that  trusts 
are  caused  by  superior  efficiency  in  production,  we  are  not,  of 
course,  without  assignable  reasons  adequate  to  explain  the 
movement  towards  consolidation  in  the  United  States.  Control 
over  limited  supplies  of  natural  resources  is  the  strength  of 
some  combinations  ;  railway  discriminations,  patent  rights,  and 
the  shelter  of  protective  duties  have  given  material  comfort  and 
support  to  others.  The  opportunity  to  secure  fancy  prices  for 
manufacturing  plants,  which  could  then  be  capitalized  at  still 
higher  figures  for  the  profit  of  the  promoter  and  financier,  is 
another  explanation  of  vast  importance.  With  so  many  pre- 
miums offered  for  combinations,  the  only  cause  for  wonder  is 
that  any  industries  have  escaped  consolidation.  Finally,  the 
losses  that  competition  often  entails,  which  have  been  made 
worse  by  unwise  laws,  have  furnished  a  pretext  of  no  little 


4/2  TRUSTS,    POOLS  AND   CORPORATIONS 

plausibility  for  attempts  to  form  monopolies.  It  is  at  this  point 
that  the  arguments  in  favor  of  trusts  possess  most  weight. 

Yet,  with  all  the  strength  that  the  movement  towards  com- 
bination has  acquired,  competition  has  always  vexed  the  would-be 
monopolist,  and  is  especially  active  at  the  present  moment.  As 
this  is  written,  one  trust  is  already  confronted  by  fourteen  inde- 
pendent companies,  while  another  rival  enterprise  with  a  capital 
of  $1,000,000  is  in  process  of  formation.  Another  combination 
owning  290  mills  was,  in  October,  confronted  by  independent 
companies  operating  74  mills ;  and  in  December  a  new  concern 
with  a  capital  of  $5,000,000  was  formed.  Almost  every  day 
brings  word  of  the  appearance  of  new  competitors  for  various 
trusts,  and  the  New  York  Journal  of  Commerce  says  that  the 
revival  of  competition  may  be  considered  a  general  movement. 
Some  of  the  independent  enterprises  may  have  been  started 
with  the  purpose  of  selling  out  to  the  trusts ;  but,  if  combina- 
tions have  the  superior  efficiency  that  is  claimed  for  them,  they 
are  under  no  obligation  to  purchase,  and  the  investors  in  rival 
concerns  would  be  taking  inconceivable  risks  if  competition 
were  really  useless.  Trusts  purchase  rival  concerns  because 
competition  from  such  companies  is  dangerous,  and  not  hope- 
less; and  the  revival  of  independent  enterprise  is  a  reason  for 
believing  that  the  business  world  has  not  accepted  the  theory 
that  a  combination  possesses  material  advantages  over  separate 
companies  of  a  large  size.  Experience  may  yet  demonstrate 
that  the  attempt  to  "  regulate  "  industry  by  consolidated  enter- 
prise is  the  surest  method  of  producing  over-investment  and 
depression.1 

If  one  concedes  that  competition  is  attended  with  real  evils, 
he  is  admitting  nothing  that  economists  have  not  known  for  a 
long  time ;  and,  if  it  is  denied  that  combination  is  a  good,  or 
even  possible,  remedy  for  the  ills  from  which  we  occasionally 
suffer,  all  hope  of  escape  does  not  disappear.  The  growth  of 
fixed  capital  has  undoubtedly  introduced  into  industry  a  dis- 
turbing element,  productive  sometimes  of  fluctuating  prices  and 
excessive  investments  of  capital  in  certain  directions.  The  situa- 

1  On  the  inevitable  persistence  of  competition,  even  under  a  general  attempt  to 
establish  monopolies,  see  Clark  in  Economic  Studies,  I,  13. 


TRUST   LITERATURE:    SURVEY  AND    CRITICISM     473 

tion  can  be  improved  by  the  repeal  of  unwise  laws  that  intensify 
whatever  unhealthful  tendencies  competition  may  have ;  and, 
beyond  that,  relief  can  be  found  in  measures  that  will  raise 
business  management  to  a  higher  plane.  The  moral  and  legal 
responsibility  of  our  captains  of  industry  must  be  made  com- 
mensurate with  the  enormous  powers  that  they  wield ;  and  the 
same  moral  restraints  to  which,  in  the  last  analysis,  even  believ- 
ers in  combination  appeal,1  would  prove  a  solvent  of  the  very 
ills  which  monopoly  is  supposed  to  remedy.  Then  sound  judg- 
ment can  be  fostered  by  the  further  development  of  industrial 
statistics ;  and,  finally,  the  substitution  of  a  moderate  policy  in 
the  place  of  monopoly-hunger  would  be  more  helpful  than  all 
else.  It  may  be  found,  in  the  long  run,  that  a  willingness  to 
allow  one's  neighbors  to  live  not  only  possesses  more  solid 
advantages  than  the  "economies  of  combination,"  but  is  the 
only  basis  upon  which  private  ownership  and  control  of  industry 
can  continue.  As  corporate  enterprises  in  America  grow  older, 
each  company  may  cease  to  be  dominated  by  a  few  men;  and 
the  management  may  come  to  represent  the  average  opinion  of 
the  stockholders.2  Such  conditions  would  probably  favor  the 
development  of  a  "live  and  let  live"  policy.  In  any  event,  it 
will  prove  easier  to  impress  upon  independent  business  firms 
the  saving  grace  of  moderation  than  to  persuade  the  monopolist 
to  exercise  his  powers  in  a  wise  and  benevolent  manner.  Good 
despots  there  have  been,  undoubtedly;  but  we  have  had  no 
experience  with  human  nature  that  goes  to  prove  that  autocratic 
control  is  generally  safer  in  industry  than  in  politics. 

CHARLES  J.   BULLOCK. 

HARVARD  UNIVKRSITY. 


INDEX 


ADDYSTON  PIPE  COMPANY. 

Organization  of,  86;  1'urposes  of  Agree- 
ment,   90  ;      Practical     Construction 
and  Operation,  92  ;    Effects  upon  the 
Public,  97;    271. 
AMERICAN    TIN-PLATE    COMPANY.      See 

Tin-Plate    Industry. 
Charter  of,  311  ;    Policy  of,  314. 
ANTI -TRUST  LAW. 

Interpretation  of,    255,   263 ;    Text   of, 

322  ;    Interpretation  of,  332. 
ASPHALT  COM  PA  NIKS,  218. 
AUDITORS. 

Duties   of,    in    England,  425  ;   in  Ger- 
many, 400. 

BEEF  TRUST,  277. 

BETHLEHEM  STEEL  COMPANY,  193. 

Scf  also  United  States  Shipbuilding 

Company,  215. 
BOND  CONVERSION.      See  United  States 

Steel  Corporation. 

CAPITALIZATION. 

International  Mercantile  Marine  Com- 


DEPRECIATION. 

Regulation  of,  in  Germany,  403. 
DISTILLEKS' AND  CATTLE-FEEDERS' TRUST. 

See  Whiskey  Trust. 
DIVIDENDS. 

Payment  of  Unearned,  xx. 

ECONOMIES. 

In  Industrial  Combinations,  451;   Buy- 
ing   Materials    or    Selling    Products, 
454  ;    Advertising,  455. 
ENGLAND. 

New  Companies  Act,  414. 

FEDERAL  INCORPORATION,  xxviii. 
FEDERAL  LICENSE,  xxviii. 
FRAUD. 

Prevention  of,  in  England,  427. 
FREIGHT  KATES. 

And  Price  of  Salt,  20  ;  and  Prices  of 
Pipe,  97;  on  Coal,  112;  under  Com- 
bination, 437;  Economy  in,  452. 


Promotion  of  Companies  and  Valuation 


and  Surplus,  144;    anrl  Consolidation, 
14^;   Three  Theories  ot    Regulation, 
386;    P>asis  of.  in  Germany,  393. 
COM  PET i  ni  IN. 

And  Monopoly,  467. 

CORPORAIION.       See    <ilso    Holding    Cor- 
porate ms. 

New     Fngli-h     Law,    414.       See    also 
Germany  and    Massachusetts. 

C'UNARD  (  '<  iMPANY.      , 

Income  Account  of.  109. 


INDUSTRIAL    COMR 

Trusts. 

Salt.  10  ;  at  ('onunon  [.aw.  2^0  ;  Agree- 
ments to  rai-e  I'ri.-es  Invalid,  2;2; 
Agreeni'  nt-;  to  raise  Prices  Crimin  ;!. 
240;  before  United  States  Suprcir.  • 


475 


INDEX 


Court,  254  ;  Tin-Rate,  305  ;  Fiscal 
Aspects  of,  436  ;  Literature  on,  436  ; 
Economies,  451. 

INTERNAL  REVENUE. 
Spirits,  23. 

INTERNATIONAL    MERCANTILE     MARINE 

COMPANY,  125. 

Fluctuations  in  Net  Earnings,  no; 
Ocean  Freight  Rates,  114;  Promo- 
tion, 117;  Faulty  Arrangement  of 
the  Capital,  118. 

INTERNATIONAL  SALT  COMPANY,  21. 

LABOR  COMBINATIONS,  239. 
LARGE-SCALE  PRODUCTION. 

And  Monopoly,  446. 
LEGISLATION.      See   England,   Germany, 

Massachusetts. 

Suggestions    for    Anti-Trust,    280 ;    for 
Tin-Plate  Industry,  295  ;    Massachu- 
setts Law,  383. 
LOTTERY  CASES,  273. 

MASSACHUSETTS. 

Public  Control  in,  121 ;  Anti-Stock- 
Watering  Laws  of  1894,  126;  Policy 
in  Valuation,  135;  Business  Corpo- 
ration Law  of,  382;  Policy  in  Issue 
of  Stock,  389. 

MICHIGAN  SALT  ASSOCIATION,  i. 

MONOPOLY. 

And  Large-Scale  Production,  446;  and 
Patents,  452;  and  Mass  of  Capital, 
461;  Investments  of  Fixed  Capital, 
463;  and  Competition,  467. 

NORTHERN  PACIFIC  RAILWAY  COMPANY. 

See  Northern  Securities  Company,  324. 
NORTHERN  SECURITIES  COMPANY,  274. 
Decision    of   Supreme  Court   in,    322; 
History   of,    324,    367;     Charter    of, 
326. 

OCEAN  FRF.TGHT  RATES. 

Fluctuations,  1 14. 

OVER-CAPITALIZATION.     See  ii/sn  Capital- 
isation. 

Evils  of,  xxiii,  125. 


PATENTS,  75. 

And  Monopoly,  452. 
POOLS. 

Historical  growth  of,  x  ;  Michigan 
Salt  Association,  I ;  Whiskey,  26, 
27;  Wire-Nail,  46;  Recent  Iron  and 
Steel,  73;  Steel  Rail,  80;  Steel 
Beam,  81;  Steel  Plate,  82;  Decisions 
in  Railway,  266. 
PRICE,  xxv. 

Of  Salt,  14;  of  Corn  and  Whiskey,  34, 
42;  Stability  of  Whiskey,  39;  of 
Nails  before  Combination,  48;  under 
Wire -Nail  Pool,  58,  63,  68;  Chart 
for  Rolled  Steel  Products,  78;  under 
Billet  Pool,  78;  under  Addyston 
Pipe  Company,  100;  of  Tin- Plate, 
306. 
PROFITS. 

Salt  Manufacture,  16;  Whiskey  Trust, 
40;  Early  Wire-Nail,  47;  Irregu- 
larity of,  of  Cunard  Company,  116; 
Relation  to  Capital,  137;  of  Pro- 
moters in  Germany,  401. 
PROMOTERS'  LIABILITY,  218. 

See  also  Promotion. 
PROMOTION,  xix. 

International  Mercantile  Marine  Com- 
pany, 117;  of  United  States  Ship- 
building Company,  183;  of  Asphalt 
Companies,  218;  in  Germany,  393, 
401;  of  Companies  in  England,  416. 
PROSPECTUS. 

Issue  of,  in   England,  418;    of  United 

States  Shipbuilding  Company,  195. 
PUBLICITY,  xxix. 

In    Massachusetts,    389;    in    Germany, 
393;    in  England,  414. 

RAILROAD  CONSOLIDATION,  375. 
RAILROAD  INJUNCTION  SUITS,  278. 
REAL  ESTATE  TRUSTS. 

In  Massachusetts,  xiii. 
RESERVE. 

Treatment  of,  in  Germany,  409. 

SHF.RMAN   ACT.     See  Anti-Trust  Law. 
SHIPPING  TRUST,  107. 


INDEX 


477 


See   International    Mercantile    Marine- 
Company,  105;    Faulty  Arrangement 
of  the  I  apital,  118. 
SPECULATIVE  MANAGEMENT,  x.\i. 
STANDARD  On.  COMPANY,  245,  261,  431. 
STKKET  RAILWAYS. 

Capitali/.ation,  127. 
SUGAR  TRUST,  245,  265,  453. 


TARIFF. 

Salt,  20;    and  Xail  Pool,  154;   Tin-Plate 

Legislation,  295;    and  Trusts,  438. 
TIN-PLATE  INDUSTRY,  289. 

Method  of  Manufacture  in,  293;  Growth 
of,  301;  Effect  on  Foreign  Makers, 

3°3- 

TRADE  COMBINATIONS,  230. 
See  Industrial  Combinations. 

TRUSTS.       Sec    also   Industrial    Combina- 
tions. 

In  Massachusetts,  xiii;  Whiskey,  22, 
31;  Forfeiture  of  Charters,  244; 
Sugar,  265;  Heef,  277;  Literature 
of,  428;  ( Mficial  Investigations  of, 
430;  Literature  relating  to  Abuses 
of,  437;  Legal  Literature  on,  440; 
Monopolistic  Character  of,  442;  and 
Industrial  Leadership,  459. 


UNITED  STATF.S  SHIPBUILDING  COMPANY. 
Incorporation,  182;  Offer  of  Pro- 
moters, 183;  Acceptance  by  Com- 
pany, 186;  Purchase  of  Subsidiary 
Plants,  187;  Working  Capital  of, 
194;  Misleading  Prospectus  of,  195; 
Value  of  the  Plants,  197;  Excessive 
Price  paid  for  Plants,  201 ;  Causes 
of  Failure  of,  207. 

UNITED  STATES  STEEL  CORPORATION. 
Valuation  of  Assets,  163,  173. 

UNITED    STATES    STEEL    CORPORATION'S 

BOND  CONVEKMON. 

Plan  offered  to  Stockholders,  149;  In- 
junction against,  150;  G.ound  on 
which  Injunction  Granted,  153; 
Charge  of  Fraud  in,  157;  Charge  of 
Discrimination  in,  159;  Later  His- 
tory and  Results  of,  178. 

UNITED  STATES  SUPREME  COURT. 
Industrial  Combinations  before,  254. 

WAGES. 

Influence  of  Whiskey  Trust,  39  ;.  Effect 
of  Wire-Nail  Pool,  62  ;    under   Tin- 
Plate  Combination,   318. 
WHISKEY  TRUST,  22. 

Trust  Agreement,  33,  453. 
WIRE-NAIL  ASSOCIATION,  46. 


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